<PAGE>

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  FORM 10-K/A
                               (AMENDMENT NO. 2)

[x]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2004

                                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

      FOR THE TRANSITION PERIOD FROM _______________ TO _________________.
                         COMMISSION FILE NUMBER 0-12957

                           ENZON PHARMACEUTICALS, INC.
             (Exact name of registrant as specified in its charter)

                    DELAWARE                                  22-2372868
         (State or other jurisdiction of                   (I.R.S. Employer
         incorporation or organization)                    Identification No.)

685 ROUTE 202/206, BRIDGEWATER, NEW JERSEY                       08807
(Address of principal executive offices)                      (zip code)

                          (908) 541-8600 (Registrant's
                     telephone number, including area code)

Securities registered pursuant to Section  12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

         Common Stock, $.01 par value; Preferred Stock Purchase Rights
                                (Title of Class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

         The aggregate market value of the Common Stock, par value $.01 per
share, held by non-affiliates based upon the reported last sale price of the
Common Stock on December 31, 2003, was approximately $516,057,000.

         As of September 7, 2004, there were 43,756,134 shares of Common Stock,
par value $.01 per share, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on December 7, 2004, to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year, has been incorporated by reference, in whole or in part, into Part III
Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.

<PAGE>

                                EXPLANATORY NOTE

         This annual report on Form 10-K/A (Amendment No. 2) amends and restates
Form 10-K for the fiscal year ended June 30, 2004 filed on September 13, 2004,
as amended by Form 10-K/A (Amendment No. 1) filed on November 10, 2004
(collectively, the "Original Annual Report"). We are amending and restating our
Original Annual Report in its entirety with respect to our accounting for
computational changes in the valuation and the application of hedge accounting
for a zero cost protective collar arrangement under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Securities", as amended (SFAS No. 133). The protective collar arrangement was
entered into during August 2003 to reduce the exposure to changes in the fair
value of the 1.5 million shares of common stock of NPS Pharmaceuticals, Inc.
("NPS") we received in connection with a June 2003 merger termination agreement.

         This amended annual report on Form 10-K/A for the year ended June 30,
2004 reflects corrections and restatements of the following financial
statement: (a) consolidated balance sheet as of June 30, 2004; (b) consolidated
statement of operations for the year ended June 30, 2004; (c) consolidated
statement of stockholders' equity for the year ended June 30, 2004; and (d)
consolidated statement of cash flows for the year ended June 30, 2004.

         We are also filing under separate documents amended quarterly reports
on Form 10-Q/A for the quarters and fiscal year-to-date periods ended September
30, 2003, December 31, 2003 and March 31, 2004. For a more detailed description
of corrections and restatements made to the financial statements, see Note 2,
"Restatement of Consolidated Financial Statements", to the accompanying notes to
the consolidated financial statements.

         In addition to the changes discussed above, we have also made other
changes, including but not limited to the following: (a) components of our total
assets and total stockholders' equity for the year ended June 30, 2004 in "Item
6 Selected Financial Data"; (b) other income for the year ended June 30, 2004
under "Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations"; (c) unrealized loss on securities that arose during the
year and our total comprehensive loss for the year ended June 30, 2004 in Note
4, "Comprehensive Income", to the accompanying notes to the consolidated
financial statements; (d) pro forma net income (loss) and pro forma net income
(loss) per common share for the fiscal year ended June 30, 2004 in Note 3,
"Summary of Significant Accounting Policies", to the accompanying notes to the
consolidated financial statements; (e) unrealized gain previously recognized in
other income and recorded in other comprehensive income for the year ended June
30, 2004 with respect to the sale and repurchase of shares of NPS common stock
in Note 15, "Merger Termination Agreement", to the accompanying notes to the
consolidated financial statements; (f) total gross deferred tax assets, and
income tax provision for the year ended June 30, 2004 in Note 16, "Income
Taxes", to the accompanying notes to the consolidated financial statements; (g)
classification of the NPS common stock between current and non-current assets
and (h) net income (loss) and net income (loss) per common share for the quarter
and fiscal year ended June 30, 2004 and all of the related financial information
for each of the fiscal quarters in Note 24, "Quarterly Results of Operations
(Unaudited)", to the accompanying notes to the consolidated financial
statements.

         This amended and restated annual report on Form 10-K/A is as of the end
of our fiscal year 2004 as required by Form 10-K or as of the date of filing the
original Form 10-K. It does not update any of the statements contained therein
for subsequent events or forward looking statements. This annual report on Form
10-K/A contains forward looking statements, which were made at the time of the
original annual report and is subject to the factors described in "Item 7.
Business -- Risk Factors" and must be considered in light of any subsequent
events and subsequent statements including forward looking statements in any
written statement subsequent to the filing of the original annual report,
including statements made in filings on reports on Form 8-K.

                                        i
<PAGE>

                          ENZON PHARMACEUTICALS, INC.
                         2004 FORM 10-K/A ANNUAL REPORT

                               TABLE OF CONTENTS

                                                                          Page
                                                                         ------

                                 PART I

Item 1.  Business                                                             1
Item 2.  Properties                                                          26
Item 3.  Legal Proceedings                                                   26
Item 4.  Submission of Matters to a Vote of Security Holders                 26

                                 PART II

Item 5.  Market for the Registrant's Common Equity, Related
         Stockholder Matters, and Issuer Purchases of
         Equity Securities                                                   27
Item 6.  Selected Financial Data                                             28
Item 7.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                           28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk          50
Item 8.  Financial Statements and Supplementary Data                         50
Item 9.  Changes in and Disagreements With Accountants on Accounting
         and Financial Disclosure                                            50
Item 9A. Controls and Procedures                                             51

                                PART III

Item 10. Directors and Executive Officers of the Registrant                  52
Item 11. Executive Compensation                                              52
Item 12. Security Ownership of Certain Beneficial Owners and Management
         and Related Stockholder Matters                                     52
Item 13. Certain Relationships and Related Transactions                      52
Item 14. Principal Accounting Fees and Services                              52

                                 PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K     53



                                       ii
<PAGE>



ABELCET(R), ADAGEN(R), CLEAR(R), MARQIBO(R), ONCASPAR(R), and SCA(R) are our
registered trademarks. Other trademarks and trade names used in this annual
report are the property of their respective owners.

         All information on the Form 10-K/A (Amendment No. 2) is as of September
13, 2004, except as described in the "Explanatory Note" on page 2 and other
non-material changes that have been made subsequent to such date and the Company
undertakes no obligation to update this information.

         This Annual Report contains forward-looking statements; which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof, or
other variations thereof, or comparable terminology, or by discussions of
strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The matters set forth in the
section entitled Risk Factors in Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to vary materially from the future results indicated in such
forward-looking statements. Other factors could also cause actual results to
vary materially from the future results indicated in such forward-looking
statements.

         We maintain a website at www.enzon.com to provide information to the
general public and our stockholders on our products, resources and services
along with general information on Enzon and its management, career
opportunities, financial results and press releases. Copies of our most recent
annual report on Form 10-K/A, our quarterly reports on Form 10-Q and our other
reports filed with the Securities and Exchange Commission, or SEC, can be
obtained, free of charge as soon as reasonably practicable after such material
is electronically filed with, or furnished to the SEC, from our Investor
Relations Department by calling 908-541-8777, through an e-mail request from our
website at www.enzon.com/request or through the SEC's website by clicking the
direct link from our website at www.enzon.com/request or directly from the SEC's
website at www.sec.gov. Our website and the information contained therein or
connected thereto are not intended to be incorporated into this annual report on
Form 10-K/A.

         Our Board of Directors has adopted a Code of Conduct that is applicable
to all of our directors, officers and employees. Any material changes made to
our Code of Conduct or any waivers granted to any of our directors and executive
officers will be publicly disclosed by filing a current report on Form 8-K
within five business days of such material change or waiver. We intend to make
copies of the charters of the Finance and Audit Committee, the Nominating and
Corporate Governance Committee and the Compensation Committee of our Board of
Directors, which comply with the recently adopted corporate governance rules of
the Nasdaq National Market, available on our website at www.enzon.com. A copy of
our Code of Conduct is available upon request by contacting our Investor
Relations Department by calling 908-541-8777 or through an e-mail request from
our website at www.enzon.com/request.


                                       iii
<PAGE>

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

         We are a biopharmaceutical company that is focused on the discovery,
development, manufacture, and commercialization of pharmaceutical products in
three areas of therapeutic focus: oncology and hematology, transplantation, and
infectious disease. Our strategy is designed to broaden our revenues and product
pipeline through internal research and development efforts complemented by
strategic transactions that provide access to marketed products and promising
clinical compounds.

         We have developed or acquired four human therapeutic products that we
currently market: ABELCET(R) (amphotericin B lipid complex injection),
ONCASPAR(R) (pegaspargase), ADAGEN(R) (pegademase bovine injection), and
DEPOCYT(R) (cytarabine liposome injection). We market our products through our
specialized North American sales force that calls upon oncologists,
hematologists, and specialists in the areas of transplantation and infectious
disease. We also receive royalties on sales of PEG-INTRON(R), a PEG-enhanced
version of Schering-Plough's product, INTRON(R) A (interferon alfa-2b,
recombinant), as well as a share of certain revenues received by Nektar
Therapeutics ("Nektar") on sales of Hoffmann-La Roche's PEGASYS(R), a
PEG-enhanced version of ROFERON(R) - A (interferon alfa-2a recombinant).

         ABELCET is a lipid complex formulation of amphotericin B used primarily
in the hospital to treat immuno-compromised patients with invasive fungal
infections. It is indicated for the treatment of invasive systemic fungal
infections in patients who are intolerant of conventional amphotericin B therapy
or for whom conventional amphotericin B therapy has failed. ABELCET provides
patients with the broad-spectrum efficacy of conventional amphotericin B, while
causing significantly lower kidney toxicity than conventional amphotericin B.
ONCASPAR is a PEG-enhanced version of a naturally occurring enzyme called
L-asparaginase. It is currently approved in the U.S., Canada, and Germany and is
used in conjunction with other chemotherapeutics to treat patients with acute
lymphoblastic leukemia who are hypersensitive or allergic to native or
unmodified forms of L-asparaginase. ADAGEN is used to treat patients afflicted
with a type of Severe Combined Immunodeficiency Disease, or SCID, also known as
the Bubble Boy Disease, which is caused by the chronic deficiency of the
adenosine deaminase enzyme, or ADA. DEPOCYT is an injectable chemotherapeutic
approved for the treatment of patients with lymphomatous meningitis.

         PEG-INTRON is a PEG-enhanced version of Schering-Plough's alpha
interferon product, INTRON A. We designed PEG-INTRON to allow for less frequent
dosing and to yield greater efficacy as compared to INTRON A. Our worldwide
partner for PEG-INTRON, Schering-Plough, has received approval in the United
States and the European Union for PEG-INTRON as a monotherapy and for use in
combination with REBETOL(R) (ribavirin, USP) capsules for the treatment of
chronic hepatitis C in adult patients not previously treated with
alpha-interferon. In April 2004, Schering-Plough reported that it has submitted
a New Drug Application to the Ministry of Health, Labor and Welfare ("MHLW") in
Japan seeking marketing approval for PEG-INTRON in combination with REBETOL for
the treatment of chronic hepatitis C. The MHLW is conducting a priority review
of the application. PEG-INTRON is also being evaluated for use as long term
maintenance monotherapy in cirrhotic patients that have failed previous
treatment (COPILOT study). PEG-INTRON is also being evaluated in several
investigator-sponsored clinical trials, including a Phase 3 clinical trial for
high risk malignant melanoma, and several earlier stage clinical trials for
other oncology indications.

         Our drug development programs focus on human therapeutics for
life-threatening diseases through applications of our macromolecular engineering
technology platform, including our proprietary PEG (polyethylene glycol)
modification and single-chain antibody (SCA(R)) technologies. We also complement
our internal research and development efforts with strategic transactions and
partnerships that provide access to promising clinical compounds. MARQIBO(R)
(vincristine sulfate liposomes injection), which was formerly referred to as
Onco TCS and which we are jointly developing with our partner Inex
Pharmaceuticals Corporation ("Inex"), is currently being evaluated for marketing
approval by the United States Food and Drug Administration ("FDA"). We are also
internally developing two late-stage clinical compounds, Pegamotecan and ATG-
FRESENIUS S, and we have various other compounds at earlier stages of
development that we are developing independently or through strategic
partnerships.

         MARQIBO was designed to increase the effectiveness and reduce the side
effects of the widely used, off-patent, anticancer drug vincristine. MARQIBO is
vincristine encapsulated in Inex's proprietary sphingosomal drug delivery
technology. In January 2004, we entered into a North American development and
commercialization agreement with Inex for MARQIBO. MARQIBO is based on Inex's
novel sphingsomal drug delivery technology, which by loading vincristine into
lipid carriers provides prolonged blood circulation and accumulation and
extended drug release at the tumor sites. In preclinical studies, MARQIBO has
been shown to offer a sustained delivery of vincristine at tumor sites. These
characteristics are intended to increase the effectiveness and reduce the
adverse effects of MARQIBO, as compared to vincristine. In May 2004, the FDA
accepted a New Drug Application ("NDA") seeking marketing approval for MARQIBO
as a single-agent treatment for relapsed aggressive non-Hodgkin's lymphoma
("NHL") for patients previously treated with at least two combination
chemotherapy regimens. The target date for completion of FDA review is January
15, 2005. In addition to relapsed, aggressive NHL, along with Inex, we are also
exploring the development of MARQIBO for a variety of other cancers including
first-line aggressive NHL in combination with other chemotherapeutic agents.

                                       1
<PAGE>

         Pegamotecan is a PEG-enhanced version of camptothecin, a compound in
the class of molecules called topoisomerase I inhibitors. Camptothecin has been
shown in clinical testing to be potent against certain tumor types, but its
previous clinical development by others has been discontinued due to significant
side effects and poor solubility. We have demonstrated in preclinical studies
that Pegamotecan preferentially accumulates in tumors and has comparable or
better efficacy compared to other cytotoxic compounds, including a currently
marketed topoisomerase I inhibitor. In January 2004, patient dosing was
initiated in a pivotal clinical trial designed to evaluate Pegamotecan as a
single-agent therapy for the treatment of gastric and gastroesophageal junction
cancers in patients who had received prior chemotherapy.

         ATG-FRESENIUS S is a polyclonal antibody preparation used for
T-lymphocyte suppression in organ transplant patients in order to prevent organ
graft rejection. ATG-FRESENIUS S is currently marketed by Fresenius Biotech GmbH
("Fresenius") in over 60 countries worldwide. In June 2003, we in-licensed the
North American rights to ATG-FRESENIUS S from Fresenius. We believe
ATG-FRESENIUS S has advantages over competitive monoclonal antibody products on
the market because unlike monoclonal antibodies, which target one specific
receptor, polyclonal antibodies target numerous receptors in the immunologic
process. We also believe ATG-FRESENIUS has advantages over other polyclonal
antibody products on the market because the product preferentially targets and
depletes only activated T-cells, rather than activated and non-activated
T-cells. The activated T-cells are those which may potentially result in an
immunologic attack on the transplanted organ leading to its rejection. For solid
organ transplantation, ATG-FRESENIUS S has been shown to be effective, typically
leading to a substantial improvement of graft survival. Clinicians have
demonstrated that ATG-FRESENIUS S can be administered conveniently as a single
high dose just prior to the surgical procedure. Moreover, clinicians have
reported using ATG-FRESENIUS S for conditioning regimens and prevention of graft
versus host disease in bone marrow transplantation. We intend to pursue
marketing approval for ATG-FRESENIUS S in the U.S. by initiating a pivotal
clinical trial for this product subject to, and in accordance with, the U.S.
Food and Drug Administration (FDA) requirements during the second half of
calendar year 2004.

         We have also out-licensed our proprietary PEG and SCA technology on our
own and through our strategic partners Nektar Therapeutics ("Nektar") and
Micromet AG ("Micromet"). There are currently two PEG products licensed through
our Nektar partnership in late-stage clinical development, MACUGEN(TM)
(pegaptanib sodium injection) for age-related macular degeneration and diabetic
macular edema and Celltech Group's CDP870, an anti-TNF-alpha PEGylated antibody
fragment in development for the treatment of rheumatoid arthritis and Crohn's
disease. In August 2004, Eyetech Pharmaceuticals, Inc. and its worldwide
development and commercialization partner, Pfizer, announced the FDA's
acceptance of an NDA for MACUGEN(TM) for the treatment of neovascular
age-related macular degeneration. The FDA has designated the MACUGEN(TM) NDA for
Priority Review.

         We manufacture ABELCET, ADAGEN, and ONCASPAR in two facilities in the
United States. DEPOCYT is manufactured by SkyePharma. PEG-INTRON is manufactured
and marketed by Schering-Plough.

MARKETED PRODUCTS

     ABELCET

         ABELCET is a lipid complex formulation of amphotericin B used primarily
in the hospital to treat immuno-compromised patients with invasive fungal
infections. It is indicated for the treatment of invasive systemic fungal
infections in patients who are intolerant of conventional amphotericin B therapy
or for whom conventional amphotericin B therapy has failed. ABELCET provides
patients with the broad-spectrum efficacy of conventional amphotericin B, while
providing significantly lower kidney toxicity than amphotericin B.

         We acquired the North American rights to ABELCET from Elan in November
2002 for $360.0 million, plus acquisition costs. As part of the acquisition, we
also acquired the operating assets associated with the development, manufacture,
sales and marketing of ABELCET in North America, including a 56,000 square foot
manufacturing facility in Indianapolis, Indiana. In addition to North American
distribution rights we also acquired the rights to develop the product in Japan.

         Invasive fungal infections are life-threatening complications often
affecting patients with compromised immune systems, such as those suffering from
cancer, HIV, and recipients of organ or bone marrow transplants.

                                       2
<PAGE>

         They can be caused by a multitude of different fungal pathogens that
attack the patient's weakened immune system. Effective treatment is critical and
can mean the difference between life and death, and often must be initiated even
in the absence of a specific diagnosis.

         The increase in severe fungal infections is primarily driven by
advances in medical treatment, such as increasingly aggressive chemotherapy
procedures and advances in organ and bone marrow transplantation procedures.
These advances have caused an increase in the number of immuno-compromised
patients who are at risk from a variety of fungal infections, which are normally
combated by an individual's healthy immune system. For these patients, such
infections represent a major mortality risk.

         Amphotericin B, the active ingredient in ABELCET, is a broad-spectrum
polyene anti-fungal agent that is believed to act by penetrating the cell wall
of a fungus, thereby killing it. In its conventional form, amphotericin B is
particularly toxic to the kidneys, an adverse effect that often restricts the
amount that can be administered to a patient. While still exhibiting residual
nephrotoxicity, ABELCET is able to deliver therapeutic levels of amphotericin B
while significantly reducing the kidney toxicity associated with the
conventional drug.

         It has been suggested in published papers that the enhanced therapeutic
index of ABELCET relative to conventional amphotericin B is due in part to the
selective release of active amphotericin B at the sites of infection. It has
also been suggested that this release may occur through the action of
phospholipases that are released by the fungus itself or by activated host
cells, including phagocytic, vascular smooth muscle, or capillary endothelial
cells.

         The clinical utility of ABELCET has been documented in a multi-center
database developed for clinicians to share and exchange information regarding
the clinical course of invasive fungal infections and clinical experience with
ABELCET. The Collaborative Exchange of Antifungal Research (CLEAR(R)) database
is one of the most comprehensive registries in fungal disease. CLEAR encompasses
retrospectively gathered data from over 3,500 patient records, collected from
1996 to 2000 from over 120 institutions in the United States and Canada.

         The CLEAR database supports the efficacy and safety of ABELCET across a
wide spectrum of fungal pathogens (both yeasts and molds) and broad spectrum of
patients. Additionally and of particular significance, the CLEAR database also
documents the efficacy and safety of ABELCET in rapidly emerging, more difficult
to treat and often treatment resistant pathogens such as Fusarium, Zygomycetes,
and Candida (Krusei and Glabrata). The CLEAR registry reflects the largest known
registry in these emerging fungal pathogens.

         In March 2004, to build upon the value of our CLEAR patient registry,
we launched CLEAR II(TM). CLEAR II(TM) is a multi-center registry developed by
and for clinicians to share and exchange information regarding the clinical
course of invasive fungal infections and clinical experience with ABELCET, and
other antifungal drugs. We developed CLEAR II(TM) together with former CLEAR
steering committee members, clinicians, and other advisors. CLEAR II(TM)
utilizes the speed and flexibility of web-based data collection to provide
participating research centers with online, real-time data that is collected
from patients in multiple sites across North America and accessed via the
internet. Unlike the CLEAR database, which is limited to clinical experience
with ABELCET, CLEAR II(TM) will also include data on patients treated with other
antifungal agents.

     ONCASPAR

         ONCASPAR is a PEG-enhanced version of a naturally occurring enzyme
called L-asparaginase from E. coli. It is currently approved in the U.S.,
Canada, and Germany and is used in conjunction with other chemotherapeutics to
treat patients with acute lymphoblastic leukemia who are hypersensitive or
allergic to native, i.e., unmodified, forms of L-asparaginase. We received
United States marketing approval from the FDA for ONCASPAR in February 1994.
During 2002, we amended our license agreement with Aventis Pharmaceuticals, Inc.
U.S. ("Aventis") to reacquire the rights to market and distribute ONCASPAR in
the United States, Canada, Mexico, and the Asia/Pacific region in return for a
payment of $15.0 million and a royalty of 25% on our net sales of the product
through 2014. MEDAC GmbH has the exclusive right to market ONCASPAR in most of
Europe and parts of Asia.

         L-asparaginase is an enzyme which depletes the amino acid asparagine,
which certain leukemic cells are dependent upon for survival. Other companies
market unmodified L-asparaginase in the U.S. for pediatric acute lymphoblastic
leukemia and in Europe to treat adult acute lymphoblastic leukemia,
non-Hodgkin's lymphoma, and pediatric acute lymphoblastic leukemia. The
therapeutic value of unmodified L-asparaginase is limited by its short
half-life, which requires every-other-day injections, and its propensity to
cause a high incidence of allergic reactions. We believe that ONCASPAR offers
significant therapeutic advantages over unmodified L-asparaginase. ONCASPAR has
a significantly increased half-life in blood, allowing every-other-week
administration, and it causes fewer allergic reactions.

                                       3
<PAGE>

     ADAGEN

         ADAGEN is used to treat patients afflicted with a type of Severe
Combined Immunodeficiency Disease, or SCID, also known as the Bubble Boy
Disease, which is caused by the chronic deficiency of the adenosine deaminase
enzyme ("ADA"). We received United States marketing approval from the FDA for
ADAGEN in March 1990, ADAGEN represents the first successful application of
enzyme replacement therapy for an inherited disease. SCID results in children
being born without fully functioning immune systems, leaving them susceptible to
a wide range of infectious diseases. Currently, the only alternative to ADAGEN
treatment is a well-matched bone marrow transplant. Injections of unmodified ADA
are not effective because of its short circulating life (less than 30 minutes)
and the potential for immunogenic reactions to a bovine-sourced enzyme. The
attachment of PEG to ADA allows ADA to achieve its full therapeutic effect by
increasing its circulating life and masking the ADA to avoid immunogenic
reactions.

         The ADA enzyme in ADAGEN is obtained from bovine intestine. We purchase
this enzyme from the world's only FDA-approved supplier, Hoffmann-LaRoche
Diagnostics GmbH ("Roche Diagnostics"), based in Germany, which until 2002
supplied ADA derived from cattle in Germany. In November 2000, bovine spongiform
encephalopathy ("BSE"), also known as mad cow disease, was detected in certain
cattle herds in Germany. During 2002, in order to comply with FDA requirements,
our supplier secured a new source of bovine intestines from New Zealand, which
has no confirmed cases of BSE in its cattle herds. There is evidence of a link
between the agent that causes BSE in cattle and a new variant form of
Creutzfeld-Jakob disease or nvCJD in humans. Based upon the use of certain
purification steps taken in the manufacture of ADAGEN and from our analysis of
relevant information concerning this issue, we consider the risk of product
contamination to be low. However, the lengthy incubation period of BSE and the
absence of a validated test for the BSE agent in pharmaceutical products make it
impossible to be absolutely certain that ADAGEN is free of the agent that causes
nvCJD. To date, cases of nvCJD have been rare in the United Kingdom, where large
numbers of BSE-infected cattle are known to have entered the human food chain.
To date, no cases of nvCJD have been linked to ADAGEN or, to our knowledge, any
other pharmaceutical product, including vaccines manufactured using bovine
derived materials from countries where BSE has been detected. Nonetheless, at
the present time, there may be some risk that bovine-derived pharmaceutical
products, including ADAGEN, could give rise to nvCJD.

         In September, 2003, Roche Diagnostics notified us that it has elected
to terminate our ADA supply agreement as of June 12, 2004. We are currently
seeking to develop recombinant ADA as an alternative to the bovine derived
product. This is a difficult and expensive undertaking as to which success
cannot be assured. Roche Diagnostics has indicated that it will continue to
supply us with our requirements of ADA for a reasonable period of time after
termination of our supply agreement as we work to develop another source of ADA.
If we are unable to secure an alternative source of ADA before Roche Diagnostics
discontinues supplying the material to us, we will likely experience inventory
shortages and potentially a period of product unavailability and/or a long term
inability to produce ADAGEN. If this occurs, it will have a measurable (and
potentially material) negative impact on our business and results of operations
and it could potentially result in significant reputational harm and regulatory
difficulties.

         We are marketing ADAGEN on a worldwide basis. We utilize independent
distributors in certain territories including the United States, Europe and
Australia. Currently, 78 patients in 13 countries are receiving ADAGEN therapy.
We believe some newborns with ADA-deficient SCID go undiagnosed and we are
therefore focusing our marketing efforts for ADAGEN on new patient
identification.

         We are required to maintain a permit from the United States Department
of Agriculture ("USDA") in order to import ADA. This permit must be renewed on
an annual basis. As of October 1, 2003, the USDA issued a permit to us to import
ADA through October 1, 2004.

     DEPOCYT

DEPOCYT is an injectable chemotherapeutic approved for the treatment of patients
with lymphomatous meningitis. It is a sustained release formulation of the
chemotherapeutic agent, cytarabine or Ara-C. DEPOCYT gradually releases
cytarabine into the cerebral spinal fluid (CSF) resulting in a significantly
extended half-life, prolonging the exposure to the therapy and allowing for more
uniform CSF distribution. This extends the dosing interval to once every two
weeks, as compared to the standard twice-weekly intrathecal chemotherapy dosing
of cytarabine. We acquired the North American rights to DEPOCYT from SkyePharma
in December 2002. Lymphomatous meningitis is a debilitating form of neoplastic
meningitis, a complication of cancer that is characterized by the spread of
cancer to the central nervous system and the formation of secondary tumors
within the thin membranes surrounding the brain. Neoplastic meningitis can
affect all levels of the central nervous system, including the cerebral
hemispheres, cranial nerves, and spinal cord. Symptoms can include numbness or
weakness in the extremities, pain, sensory loss, double-vision, loss of vision,
hearing problems, and headaches. Neoplastic meningitis is often not recognized
or diagnosed in clinical practice. Autopsy studies have found higher rates of
neoplastic meningitis than those observed in clinical practice. These autopsy
studies suggest that 5% of all cancer patients will develop neoplastic
meningitis during the course of their illness.

                                       4
<PAGE>

         In a randomized, multi-center trial of patients with lymphomatous
meningitis, treated either with 50 mg of DEPOCYT administered every 2 weeks or
standard intrathecal chemotherapy administered twice a week, DEPOCYT achieved a
complete response rate of 41% compared with a complete response rate of 6% for
unencapsulated cytarabine. In this study, complete response was prospectively
defined as (i) conversion of positive to negative CSF cytology and (ii) the
absence of neurologic progression. DEPOCYT also demonstrated an increase in the
time to neurologic progression of 78.5 days for DEPOCYT versus 42 days for
unencapsulated cytarabine. There are no controlled trials, however, that
demonstrate a clinical benefit resulting from this treatment, such as
improvement in disease related symptoms, increased time to disease progression,
or increased survival.

     PEG-INTRON

         PEG-INTRON is a PEG-enhanced version of Schering-Plough's recombinant
alpha-interferon product INTRON A. Linking INTRON A to PEG results not only in a
prolonged half-life, allowing for once weekly dosing, but also greater efficacy
as compared to unmodified INTRON-A. Schering-Plough currently markets INTRON A
for 16 major antiviral and oncology indications worldwide. Historically the
largest indication for INTRON A is hepatitis C. INTRON A is also used to treat
certain types of cancer. Our worldwide partner for PEG-INTRON, Schering-Plough,
has received approval for the treatment of adult patients with chronic hepatitis
C as a monotherapy and in combination with REBETOL capsules in the United States
and the European Union. Schering-Plough has also submitted a New Drug
Application in Japan seeking marketing approval for PEG-INTRON in combination
with REBETOL for the treatment of chronic hepatitis C. Schering-Plough is also
evaluating PEG-INTRON as a long term maintenance monotherapy (COPILOT study) and
in a separate study, PEG-INTRON is being evaluated in combination with REBETOL
as a treatment for hepatitis C patients who did not respond to or had relapsed
following previous interferon-based therapy. PEG-INTRON is also being evaluated
in several investigator-sponsored trials as a potential treatment for various
cancers, including a Phase 3 study for high risk malignant melanoma.

         Under our licensing agreement with Schering-Plough, we have received
milestone payments and we receive royalties on Schering-Plough's worldwide sales
of PEG-INTRON. Schering-Plough is responsible for all manufacturing, marketing
and development activities for PEG-INTRON.

     Hepatitis C

         Hepatitis C represents a serious and widespread disease affecting
millions of people worldwide. According to the World Health Organization, there
are approximately 170 million chronic cases of hepatitis C worldwide.

         According to The Centers for Disease Control and Prevention there are
approximately 3.9 million Americans infected with the hepatitis C virus (HCV),
of whom approximately 2.7 million are characterized as having chronic hepatitis
C infection. A substantial number of people in the United States who were
infected with hepatitis C more than 10 years ago are thought to have contracted
the virus through blood transfusions. Prior to 1992, the blood supply was not
screened for the hepatitis C virus. In addition, the majority of people infected
with the virus are thought to be unaware of the infection because the hepatitis
C virus can incubate for 10 or more years before patients become symptomatic.
Schering-Plough estimates that of 3.9 million Americans infected with HCV, only
1 million have been diagnosed and, of that number, about half are going
untreated.

         We believe that the number of people infected with the hepatitis C
virus in Europe is comparable to that in the United States. Japan is another
very large hepatitis C market, with an estimated 2 million people infected with
HCV. Schering-Plough states that it is the market leader today in Japan with
its INTRON A and REBETOL combination therapy, and is moving forward with its
plans to introduce the combination PEG-INTRON/REBETOL treatment for chronic
hepatitis C.

In the pivotal Phase III clinical study results, Schering-Plough reported that
PEG-INTRON plus REBETOL achieved an overall rate of sustained virologic response
("SVR") of 54% in previously untreated adult patients with chronic hepatitis C,
compared to 47% for patients treated with REBETRON (INTRON A plus REBETOL). When
analyzed on an optimized dose/body-weight basis, SVR was 61%. In 2001,
researchers performed a retrospective analysis on the pivotal clinical data in a
study designed to evaluate the effect of adherence to therapy on treatment
outcome for HCV patients receiving PEG-INTRON and REBETOL. Analysis of SVR rates
according to patient compliance during therapy showed that patients receiving
greater than or equal to 80% of their total interferon dose and greater than or
equal to 80% of their ribavirin dose for greater than or equal to 80% of the
expected duration of therapy had enhanced SVR rates compared to patients who
were not adherent to therapy.

                                       5
<PAGE>

         During June 2002, the National Institutes of Health (NIH) issued a
consensus statement asserting that the most effective treatment for hepatitis C
is combination therapy with PEGylated interferon and ribavirin for a period of
48 weeks. The consensus statement also provided recommendations on how to
broaden the treatment population as well as how to prevent transmission of the
virus.

         Hoffmann-La Roche markets PEGASYS, a PEGylated version of its alpha
interferon product ROFERON-A, in both North America and Europe. PEGASYS competes
directly with PEG-INTRON. Schering-Plough and Hoffmann-LaRoche have been the
major competitors in the global alpha-interferon hepatitis C market since the
approval of INTRON A and ROFERON-A. Since its launch in December 2002, PEGASYS
has taken market share away from PEG-INTRON and the overall market for pegylated
alpha interferon in the treatment of hepatitis C has not increased sufficiently
to offset the effect PEGASYS sales have had on sales of PEG-INTRON. As a result,
quarterly sales of PEG-INTRON and the royalties we receive on those sales have
declined in recent quarters. We cannot assure you that PEGASYS will not continue
to gain market share at the expense of PEG-INTRON, which could result in lower
PEG-INTRON sales and lower royalties to us.

         PEG-INTRON is the only pegylated alpha interferon product approved for
dosing according to patient body weight, an important factor that affects
patient response to pegylated alpha interferon treatment. Schering-Plough
initiated a new marketing campaign in the fall of 2003 to reinforce the efficacy
message of weight-based therapy with PEG-INTRON in combination with REBETOL and
has intensified its efforts to stabilize and recapture market share in order to
regain global leadership in the hepatitis C market.

         In February 2004, Schering-Plough launched the PEG-INTRON REDIPEN(TM)
injection. The PEG-INTRON REDIPEN provides the proven efficacy of PEG-INTRON in
an easy-to-use precision dosing pen that replaces a traditional vial and
syringe. Currently, it is the only pen delivery system approved for
administering PEGylated alpha interferon therapy.

         In May 2004, a nationwide clinical study was initiated involving 2,880
patients that will directly compare PEG-INTRON versus PEGASYS, both used in
combination with ribavirin (IDEAL study). Schering-Plough, in collaboration with
leading medical centers, is conducting the comparative study in response to
requests by the hepatitis C medical and patient communities, and to clear up
misperceptions in the marketplace about PEG-INTRON and PEGASYS. The trial will
compare the efficacy and safety of individualized weight-based dosing with
PEG-INTRON and REBETOL versus PEGASYS, which is administered as a fixed dose to
all patients regardless of individual body weight, and COPEGUS(R) (ribavirin,
USP) dosed either at 1,000 mg or 1,200 mg, in U.S. patients with genotype 1
chronic hepatitis C. Genotype 1 of the hepatitis C virus is the most common
worldwide, the most difficult to treat successfully, and accounts for about 70%
of hepatitis C infections among Americans.

     Cancer

         INTRON A is also used in the treatment of cancer and is approved for
several indications worldwide, including adjuvant treatment to surgery in
patients with malignant melanoma. PEG-INTRON is being evaluated in several
investigator-sponsored clinical trials, including a Phase 3 clinical trial for
high-risk malignant melanoma. PEG-INTRON is also being evaluated in several
Phase 2 studies as a stand-alone drug or in combination therapy. Two Phase 2
studies are being conducted to evaluate PEG-INTRON alone and in combination with
thalidomide in patients with gliomas and a Phase 2 study is being conducted to
evaluate PEG-INTRON in combination with the monoclonal antibody Avastin(R)
(bavacizumab) for patients with gastrointestinal carcinoid tumors. PEG-INTRON is
also being evaluated in several Phase 2 studies as a potential treatment for
ovarian epithelial, peritoneal cavity or fallopian tube cancers; metastatic
kidney cancer; and stage IV melanoma.

                                       6
<PAGE>

PRODUCTS UNDER DEVELOPMENT

     MARQIBO(R)

         In January 2004, we entered into a strategic partnership with Inex to
develop and commercialize Inex's proprietary oncology product MARQIBO
(vincristine sulfate liposomes injection), formerly referred to as Onco TCS.
MARQIBO is comprised of the widely used, off-patent, anticancer drug
vincristine, encapsulated in Inex's sphingosomal technology. Vincristine belongs
to the class of anti-cancer compounds known as mitotic inhibitors. Mitotic
inhibitors can inhibit or stop mitosis or inhibit enzymes from making proteins
needed for the reproduction of the cancer cell. Mitotic inhibitors interfere
with the cell cycle of cell division, working during the M phase of the cell
cycle.

         Vincristine's potency has resulted in it being a long-standing
cornerstone in many chemotherapy regimens. However when administered in its
native form at its indicated therapeutic dose, patients often experience
dose-limiting neurotoxicities. Consequently, physicians often cap the dosage at
a maximum of 2.0 mg per dose, which we believe may prevent the optimal dose of
native vincristine from being administered. In clinical studies MARQIBO was
safely administered at approximately twice the dose intensity, thus potentially
offering increased efficacy, as compared to vincristine.

         In preclinical studies, sphingosomal technology has been shown to offer
a targeted, increased, and sustained delivery of vincristine to tumor sites.
These combined benefits may provide an extended window for MARQIBO to kill
cancer cells during mitosis, a brief but critical phase during cell growth and
division.

         In clinical studies, MARQIBO has been administered safely at uncapped
doses, which significantly exceeded the dose levels typically administered for
conventional vincristine, while maintaining a similar side effect profile to
vincristine.

         In the multi-center pivotal Phase 2/3 trial 119 NHL patients who had
not responded to their previous therapy or had responded and subsequently
relapsed were treated with MARQIBO. MARQIBO was administered at 2.0 mg/m(2) with
no dosage cap as a one hour infusion every two weeks. Prior to enrollment in
this study, the 119 patients had received on average four other therapies and
72% had disease that was "resistant" to their last treatment. "Resistant"
disease is defined as not responding to their previous treatment or relapsing
within six months after their previous treatment. After treatment with MARQIBO,
the overall response rate was 25%, including seven patients (6% of patients)
whose tumors were completely eliminated (complete response) and 23 patients (19%
of patients) whose tumor volume was reduced by more than 50% (partial response).
An additional 31 patients (26% of patients) had their disease stabilized while
being treated with MARQIBO.

         The median duration of response for the 30 responding patients was
approximately three months from first documentation of response as measured by
computed tomography imaging (CT scan), which is typically taken approximately 2
months after the start of treatment. The primary side effect in the pivotal
study was neurotoxicity, which is the typical side effect seen with vincristine,
the active agent in MARQIBO. The neurotoxic effects were observed primarily
after many treatment cycles, whereas signs of efficacy were typically observed
within the first weeks of treatment. All patients had prior exposure to
neurotoxic agents.

         In May 2004, the FDA accepted an NDA for MARQIBO. The target date for
completion of review of the NDA is January 15, 2005. The NDA is seeking
marketing approval for MARQIBO as a single-agent treatment for patients with
relapsed aggressive non-Hodgkin's lymphoma (NHL) previously treated with at
least two combination chemotherapy regimens.

         The NDA was submitted under the provisions of Subpart H of the Food,
Drug and Cosmetic Act. The Accelerated Approval regulations are intended to make
promising products for life-threatening diseases available to the market on the
basis of preliminary evidence prior to formal demonstration of patient benefit.
 These regulations provide a path to approval using clinical data from a
single-arm trial. The risk of non-approval with an NDA submitted under Subpart H
is higher than those associated with a standard NDA review because of, among
other things, the smaller number of patients and more limited data. To the
extent the FDA challenges or invalidates any of the clinical trial data, the
risks are greater with a Subpart H review that the remaining data will not be
sufficient to support regulatory approval. Even if approval is obtained,
approvals granted under Subpart H are provisional and require a written
commitment to complete post-approval clinical studies that formally demonstrate
patient benefit. Securing FDA approval based on a single-arm trial, such as the
trial underlying the MARQIBO NDA, is a particular challenge and approval can
never be assured. If approved, we plan to market MARQIBO through our North
American specialty sales force, which currently targets the oncology market.

                                       7
<PAGE>

         In addition to relapsed aggressive NHL, along with Inex we are also
exploring the development of MARQIBO for a variety of other cancers, including
Hodgkin's disease, acute lymphoblastic leukemia, pediatric malignancies, and
first-line aggressive NHL in combination with other chemotherapeutic agents.

         The current standard first-line treatment for the aggressive form of
NHL is the CHOP chemotherapy combination, comprising the drugs cyclophosphamide,
doxorubicin hydrochloride, ONCOVIN(R) (vincristine) and prednisone, every three
weeks for six to eight cycles.

         In June 2004 at the Annual Meeting of the American Society of Clinical
Oncology (ASCO), clinicians presented follow-up results from a Phase 2
open-label trial conducted at The University of Texas M. D. Anderson Cancer
Center in Houston, Texas in which patients were treated with CHOP in which the
ONCOVIN(R) (vincristine) component was substituted with MARQIBO. In this trial,
those patients diagnosed with B-cell lymphoma also received RITUXAN(R)
(rituximab).

         Of the 68 evaluable patients 63 patients, or 93% of patients, responded
to the therapy. Sixty-two patients had their tumors completely eliminated for a
complete response rate of 91% and one patient's tumor volume decreased by more
than 50% for a partial response rate of 1% and an overall response rate of 93%.

         Of the 68 patients, 37 patients were over the age of 60 years and 91%
of these patients were complete responders. In the 31 patients under the age of
60 years, 90% were complete responders and 3% were partial responders. Treatment
was well tolerated by both groups with 6% of patients withdrawing from treatment
due to adverse events.

         Investigators also presented positive patient survival data. At a
median follow-up of 22 months, median progression-free survival and median
overall survival had not yet been reached. Overall survival was 99% (one death)
and progression-free survival was 87% (nine relapses). Progression-free survival
for the elderly patient group was 86% (five relapses) and 87% for the younger
patient group (four relapses).

         In addition to NHL, vincristine is also used in treatment regimens for
Hodgkin's disease, acute lymphoblastic leukemia, multiple myeloma, and other
solid tumors. We have estimated that in 2002, approximately 100,000 patients
were treated with vincristine and nearly 57% of those patients were NHL
patients.

         NHL is the fifth-leading cause of cancer deaths in the U.S. (23,400
estimated in 2003) and the sixth-leading cause of cancer deaths in Canada (2,800
estimated in 2003), according to estimates of the American and Canadian Cancer
Societies. According to the American Cancer Society, an estimated 54,370 new
cases of NHL will be diagnosed with, and an estimated 19,410 people will die of,
NHL in the U.S. in 2004.

     PEGAMOTECAN

         Pegamotecan is a PEG-enhanced version of camptothecin, a small molecule
that is a potent anticancer compound in the class of topoisomerase I inhibitors.
Camptothecin was originally developed at the National Institutes of Health
("NIH") and is now off patent.

         For many years, camptothecin has been known to be a highly potent
cytotoxic agent but its low solubility and systemic toxicity has rendered the
product not suitable for human use. Two camptothecin derivatives, topotecan and
irinotecan, have been approved by the FDA for the treatment of small-cell lung,
ovarian, and colorectal cancers. These two products together achieved 2002
worldwide sales of approximately $970 million.

         We have linked PEG and camptothecin so that it forms a prodrug, i.e., a
compound that is converted into the active drug within the body. The PEG
component confers a long circulating half-life and allows the compound to
accumulate in tumor sites. Animal tests have shown that Pegamotecan has better
or equal efficacy compared to other cytotoxic compounds, including other
topoisomerase I inhibitors. At the June 2004 ASCO meeting, clinical
investigators presented results from a Phase 2 study in which Pegamotecan was
evaluated as a single-agent treatment for gastric and gastroesophageal junction
cancers. In this open-label study, 35 patients with gastric and gastroesophageal
junction cancers were treated, of which 28 patients were treatment naive and
seven patients had received one prior chemotherapy regimen. Of the 35 patients
treated, 19 or 54% experienced a response or stabilization of disease. Five
patients (14%) achieved a partial response and 14 patients (40%) experienced
stable disease. Additionally, Pegamotecan showed promising activity based on
time to response and duration of response. For those patients that achieved a
partial response, the median time to response was 46 days, with a range of 40
days to 124 days, and the median duration of response was 127 days, with a range
of 108 days to 208 days.

                                       8
<PAGE>

         In January 2004 we initiated patient dosing in a clinical trial
designed to evaluate Pegamotecan as a single-agent therapy for gastric and
gastroesophageal junction cancers in patients whose disease progressed following
prior chemotherapy. We are focusing our late-stage Pegamotecan development
program on second-line therapy for gastric and gastroesophageal junction
cancers, as there are no single-agent drug approvals for these indications and
therefore, these indications offer the potential to qualify for Accelerated
Approval under Subpart H of the U.S. Food and Drug Act.

         The annual incidence of adenocarcinoma of the stomach and
gastroesophageal junction is approximately 800,000 new cases worldwide, with
approximately 24,000 of these occurring in the United States. The median
survival for patients with advanced stages of these cancers from the time of
diagnosis is approximately 7-8 months, and there is currently no drug approved
for second-line treatment.

     ATG-FRESENIUS S

         ATG-FRESENIUS S is a polyclonal antibody preparation used for
T-lymphocyte suppression in organ transplant patients, which we in-licensed in
June 2003 for North American development and marketing from Fresenius.
ATG-FRESENIUS S was first approved in September 1983 in Germany for the
prevention and treatment of acute rejection in solid organ transplantation. To
date, more than 40,000 patients in over 60 countries outside the United States
have used ATG-FRESENIUS S. Currently, the product is not approved for use in
North America.

         Dramatic advances in immunology, surgery, and tissue preservation have
transformed organ transplantation from experimental to routine over the past few
decades. Of the world's seven major pharmaceutical markets (U.S., France,
Germany, Italy, Spain, UK, and Japan), the U.S. is by far the single largest
solid organ transplant market. According to the United Network for Organ Sharing
or UNOS, in 2003 the U.S. accounted for over 23,000 organ transplantations. Of
this total, nearly 14,000 were kidney transplants.

         The immune system includes a host of targets that are impacted by the
transplant process. Monoclonal antibodies will, by definition, target only one
specific receptor such as the IL-2 receptor (Simulect/Zenapax). ATG-FRESENIUS S
is a polyclonal antibody preparation that binds to a number of targets
simultaneously, providing potentially enhanced efficacy through a more
comprehensive treatment of the immunological cascade. Thymoglobulin(R)
(anti-thymocyte globulin (rabbit)), which is marketed by Genzyme in the U.S., is
the market leading polyclonal antibody preparation for the prevention of organ
rejection in kidney transplant patients in the U.S. ATG-FRESENIUS S differs from
Thymoglobulin in a number of significant ways, particularly because it
preferentially targets and depletes only activated T-cells, rather than
activated and non-activated T-cells, leading us to believe it will emerge
successfully in the clinic and allow us to compete in the market effectively.

         Under our agreement with Fresenius, we are responsible for North
American clinical development and regulatory approval, and Fresenius is
responsible for supplying the drug and all manufacturing aspects necessary to
obtain U.S. regulatory approval. For the first indication (prevention of
rejection in solid organ transplantation) Fresenius will provide clinical
supplies at no charge to us. In September 2004 we made a milestone payment to
Fresenius of $1.0 million upon FDA approval of an Investigational New Drug
Application ("IND") for ATG-FRESENIUS S and we are obligated to make another
milestone payment of $1.0 million upon submission of a Biologics License
Application ("BLA"). Subject to and in accordance with FDA requirements, we
expect to initiate a pivotal clinical trial for ATG-FRESENIUS S for the
prophylaxis of acute organ rejection in patients receiving an organ graft before
the end of calendar 2004.

     SS1P

         SS1P is a fusion protein, or immunotoxin, consisting of a disulfide
linked antibody fragment linked to domains II and III of Pseudomonas exotoxin A.
The antibody fragment targets mesothelin, a cell surface antigen over expressed
in mesothelioma, ovarian and pancreatic cancers. Importantly, mesothelin is only
minimally expressed in normal pancreas, pancreatitis (inflammation of the
pancreas), benign pancreatic adenoma, or elsewhere in the body.

         In November 2003, we announced a Collaborative Research and Development
Agreement (CRADA) with the NIH. The development program will center on the
recombinant immunotoxin SS1P.

         Currently, the National Cancer Institute ("NCI") is conducting Phase 1
studies to determine the optimal dosing regimen and maximum tolerated dose for
SS1P. Together with the NCI, we plan to begin a Phase 2 clinical trial during
the first half of calendar 2005. Our development plan will initially focus on
mesothelioma and pancreatic cancer.


                                       9
<PAGE>

     PRECLINICAL PIPELINE

         Our macromolecular engineering platform may be applicable to other
potential products. We are currently conducting preclinical studies with respect
to additional PEG-enhanced and SCA compounds. We will continue to seek
opportunities to develop and commercialize other PEG-enhanced products on our
own and through co-commercialization partnerships.

         As part of our strategic alliance with Micromet, we have generated
several new SCA compounds against undisclosed targets in the fields of
inflammatory and autoimmune diseases. In June 2004, we extended this
collaboration to move the first of these newly created SCAs toward clinical
development. We will share development costs and future revenues with Micromet.

         As part of our strategic alliance with Nektar, we have agreed to
jointly develop up to three compounds using Nektar's pulmonary or super-critical
fluid platforms. The first compound currently under development is a Nektar
formulation of leuprolide acetate administered through the pulmonary route.
Leuprolide is a peptide analog used to treat prostate cancer and endometriosis.
Nektar is currently conducting preclinical studies on the compound that will be
used to file a U.S. IND, which we expect to file during the second half of
calendar 2004. Nektar is responsible for all costs to bring the product to the
IND stage as well as formulation and manufacturing of the product. We will be
responsible for the clinical development, regulatory filings and
commercialization of the final product.

RESEARCH AND DEVELOPMENT

         To date, our primary sources of new clinical products have been our
internal research and development activities and the licensing of compounds from
third parties, such as ATG-FRESENIUS S and MARQIBO. Research and development
expenses for the fiscal years ended June 30, 2004, 2003 and 2002 were
approximately $34.8 million, $21.0 million and $18.4 million, respectively. In
addition, the Company acquired the commercialization rights in the United
States, Canada and Mexico to MARQIBO a product being developed jointly developed
with Inex. In January 2004 the Company made a $12.0 million up front payment
which has been expensed as acquired in-process research and development.

         Our research and development activities during fiscal 2004 concentrated
primarily on the advancement of our late-stage product pipeline, namely
Pegamotecan, ATG FRESENIUS S, and our shared product development costs with Inex
for MARQIBO. We expect our research and development expenses for fiscal 2005 and
beyond will be at significantly higher levels as we continue to advance our
late-stage product pipeline and additional compounds enter clinical trials.

         Our internal research and development activities focus on applying our
proprietary PEG and SCA technologies to a pipeline of development candidates and
developing products accessed through strategic transactions, such as MARQIBO.

PROPRIETARY TECHNOLOGIES

     MACROMOLECULAR ENGINEERING

         Our proprietary drug development programs focus on engineering biologic
therapeutics or macromolecules. Since our inception, our core expertise has been
in modifying large molecule biologics through macromolecular engineering in
order to increase efficacy, improve safety profiles, generate improved versions
of existing therapeutics, and advance these drugs through development to
commercialization.

         Macromolecular Engineering is the process by which the pharmaceutical
features of macromolecules, such as proteins, peptides or oligonucleotides are
optimized through processes that include site-specific amino acid exchanges,
site selective modification with our proprietary polyethylene glycol or PEG
technology, or antibody engineering through our proprietary Single-Chain
Antibody or SCA technology. Given the advancements in genomics and proteomics
over recent years, we believe a wealth of opportunity exists across this field.
These advancements have resulted in the discovery of a significant number of
exquisitely specific and highly biologically active macromolecules, which often
lack the features needed for effective therapeutics, such as adequate
circulating half-life, physical or metabolic stability, and overcoming adverse
immunological responses that can render a compound ineffective. Through the
application of our Macromolecular Engineering expertise, we have transformed
several macromolecules into successful therapeutics, including PEG-INTRON,
ONCASPAR, and ADAGEN. In addition to our internal drug research and development
activities, we are also committed to broadening our pipeline and technology base
through in-licensing opportunities and strategic partnerships.

                                       10
<PAGE>

     PEG TECHNOLOGY

         Our proprietary PEG technology involves the covalent attachment of PEG
to therapeutic proteins or small molecules for the purpose of enhancing
therapeutic value. PEG is a relatively non-reactive and non-toxic polymer that
is frequently used in food and pharmaceutical products. We have demonstrated,
both in our marketed products and our products under development, that for some
proteins and small molecules, we can impart significant pharmacologic advantages
over the unmodified forms of the compound by modifying a compound using our PEG
technology.

         These advantages include:

o        extended circulating life,

o        lower toxicity,

o        increased drug stability, and

o        enhanced drug solubility.


                                [GRAPHIC OMITTED]

                     A DEPICTION OF A PEG-ENHANCED MOLECULE.

         For years, we have applied and continually improved our PEG technology
to engineer macromolecules to improve the pharmacologic characteristics of
potential or existing macromolecule therapeutics. We modify macromolecules with
PEG for the purpose of prolonging half-life and reducing toxicities. In some
cases, PEG can render a macromolecule therapeutically effective, where the
unmodified form had only limited clinical utility. For example, some
macromolecules frequently induce an immunologic response rendering them
therapeutically ineffective. When PEG is attached, it disguises the
macromolecule and reduces recognition by the patient's immune system. PEG
conjugation can also reduce dosing frequency and delay clearance of the active
drug resulting in an improved therapeutic effect.

         We have also developed a PEG technology that allows us to apply PEG to
small molecules. We are currently applying this technology to develop a
PEG-enhanced version of an anti-cancer compound. Like macromolecules, many
anti-cancer compounds of potentially significant therapeutic value possess
undesired pharmacologic characteristics such as toxicity, poor solubility, and
limited half-life. The attachment of PEG to anti-cancer compounds extends their
circulatory life and, at the same time, greatly increases the solubility of
these compounds. We attach PEG to macromolecules or anti-cancer compounds by
means of proprietary linker chemistries, which can be designed to incorporate a
stable chemical bond between the parent molecule and PEG or designed to release
the parent molecule over time in the proximity of the targeted tissue.
 By inactivating and then reactivating the compound in the body we create a
 prodrug version of such compounds. These attributes may significantly enhance
 the therapeutic value of new and already marketed drugs with
otherwise limited utility.

         We possess significant expertise and intellectual property in the
methods by which PEG can be attached to a compound, the selection of appropriate
sites on the compound to which PEG is attached, and the amount and type of PEG
used to tailor the PEG technology to produce the desired results for the
particular substance being modified.


                                       11
<PAGE>

     SCA TECHNOLOGY

         Antibodies are proteins produced by the immune system in response to
the presence in the body of antigens, such as bacteria, viruses or other disease
causing agents. Antibodies of identical molecular structure that bind to a
specific target are called monoclonal antibodies. Over the past few years,
several monoclonal antibodies have been approved for therapeutic use and have
achieved significant clinical and commercial success. Much of the clinical
utility of monoclonal antibodies results from the affinity and specificity with
which they bind to their targets, as well as a long circulating life due to
their relatively large size and their so-called effector function. Monoclonal
antibodies, however, are not well suited for use in acute indications where a
short half-life is advantageous or where their large size inhibits them from
reaching the area of potential therapeutic activity.

         SCAs are genetically engineered versions of antibodies incorporating
only a small portion of the antibody, namely the antigen binding domains
designated variable light (VL) and variable heavy (VH). SCA proteins are
designed to expand on the therapeutic and diagnostic applications possible with
monoclonal antibodies. SCAs have the binding specificity and affinity of
monoclonal antibodies and, in their native form, are about one-fifth to
one-sixth of the size of a monoclonal antibody, typically giving them very short
half-lives. SCAs differ from monoclonal antibodies in various respects, which
may offer benefits for certain applications:

         o  faster clearance from the body,

         o  greater tissue penetration for both diagnostic imaging and therapy,

         o  a significant decrease in immunogenicity when compared with
            mouse-based antibodies,

         o  easier and more cost effective scale-up for manufacturing when
            compared with monoclonal antibodies,

         o  enhanced screening capabilities which allow for the more rapid
            assessment of SCA proteins of desired

         o  specificity using high throughput screening methods, and the
            potential for non-parenteral application.

                                                    [GRAPHIC OMITTED]

                                                  Single-Chain Antibody
                  [GRAPHIC OMITTED]

                 Monoclonal Antibody

    COMPARISON OF A STANDARD MONOCLONAL ANTIBODY AND A SINGLE-CHAIN ANTIBODY.

         In addition to these benefits, fully human SCAs can be isolated
directly from human SCA libraries without the need for re-cloning or grafting
procedures. In specific formats, SCAs are also suitable for intracellular
expression allowing for their use, among other things, as inhibitors of gene
expression.

         We, along with numerous other academic and industrial laboratories,
have demonstrated through in vitro testing the binding specificity of dozens of
SCAs. We, in collaboration with the NCI, have shown in published preclinical
studies that SCAs localize to specific tumors and rapidly penetrate the tumors.

     SCAS UNDER DEVELOPMENT

In June 2004, we amended our April 2002 agreement with Micromet, a private
company based in Germany, after we successfully completed the first phase of
this multi-year strategic collaboration. Under the terms of the amended
agreement, Enzon and Micromet combined our significant patent estates and
complementary expertise in single-chain antibody technology. During the first
phase of the collaboration, we established a research and development unit at
Micromet's facility in Germany and generated several new SCA compounds against
undisclosed targets in the fields of inflammatory and autoimmune diseases. In
June 2004, we extended this collaboration to move the first of these newly
created SCAs toward clinical development.

                                       12
<PAGE>

         Together with Micromet, we also continue to market our combined patent
estates in the field of SCA technology with Micromet being the exclusive
marketing partner. Since the start of the alliance, Micromet has granted four
non-exclusive research licenses on behalf of the partnership. Resulting revenues
are to be used for Micromet's and Enzon's joint SCA development activities.

         In addition, prior to our collaboration with Micromet, we granted, SCA
 licenses to several companies. These licenses generally provide for milestone
 payments and royalties from the development and
commercialization of any resulting SCA product.

         The most advanced SCA-based compound is our licensee Alexion's
pexelizumab. Pexelizumab is an SCA directed against complement protein C5, which
is a component of the body's normal defense against foreign pathogens.
Inappropriate complement activation during cardiopulmonary bypass graft surgery
("CABG") and myocardial infarction can lead to clinical problems. In July 2004,
Alexion announced that they and their collaboration partner for pexelizumab,
Procter & Gamble Pharmaceuticals, Inc. (Procter & Gamble), have initiated
patient enrollment for a pivotal Phase 3 trial in patients undergoing coronary
artery bypass graft surgery (PRIMO-CABG-2). Alexion also reported in June 2004
that they, together with Procter & Gamble, had reached agreement with the FDA on
the design for the PRIMO-CABG-2 study under the Special Protocol Assessment
process. The study is expected to enroll approximately 4,000 patients in North
America and Europe. PRIMO-CABG-2 represents the second Phase 3 trial conducted
in CABG patients. Alexion expects that, if successful, this trial will complete
the filing package that will serve as the primary basis of review for the
approval of a Biologics License Application ("BLA") for the CABG indication.

         Alexion is also enrolling patients in a pivotal Phase 3 trial in
patients experiencing acute myocardial infarction (APEX-AMI). The study is
expected to enroll approximately 8,500 patients in North America, Europe,
Australia, and New Zealand over the next 24 to 36 months.

     SCHERING-PLOUGH AGREEMENT

         In November 1990, we entered into an agreement with Schering-Plough
under which Schering-Plough agreed to apply our PEG technology to develop a
modified form of Schering-Plough's INTRON A. Schering-Plough is responsible for
conducting and funding the clinical studies, obtaining regulatory approval, and
marketing and manufacturing the product worldwide on an exclusive basis and we
are entitled to receive royalties on worldwide sales of PEG-INTRON for all
indications. The royalty percentage to which we are entitled will be lower in
any country where a pegylated alpha-interferon product is being marketed by a
third party in competition with PEG-INTRON, where such third party is not
Hoffmann-La Roche.

         In June 1999, we amended our agreement with Schering-Plough, which
resulted in an increase in the effective royalty rate that we receive for
PEG-INTRON sales. In exchange, we relinquished our option to retain exclusive
U.S. manufacturing rights for this product. In addition, we granted
Schering-Plough a non-exclusive license under some of our PEG patents relating
to branched or U-PEG technology. This license gave Schering-Plough the ability
to sublicense rights under these patents to any party developing a competing
interferon product. In August 2001, Schering-Plough, pursuant to a cross-license
agreement entered into as part of the settlement of certain patent lawsuits,
granted Hoffmann-La Roche a sublicense under our branched PEG patents to allow
Hoffmann-La Roche to make, use, and sell its pegylated alpha-interferon product,
PEGASYS.

         Under this agreement, Schering-Plough was obligated to pay and has paid
us a total of $9.0 million in milestone payments, none of which are refundable.
We do not supply Schering-Plough with PEG-INTRON or any other materials and our
agreement with Schering-Plough does not obligate Schering-Plough to purchase or
sell specified quantities of any product. Schering-Plough's obligation to pay us
royalties on sales of PEG-INTRON terminates, on a country-by-country basis, upon
the later of the date the last patent of ours to contain a claim covering
PEG-INTRON expires in the country or 15 years after the first commercial sale of
PEG-INTRON in such country. These milestone payments were recognized when
received, as the earnings process was complete. Schering-Plough has the right to
terminate this agreement at any time if we fail to maintain the requisite
liability insurance of $5.0 million. Either party may terminate the agreement
upon a material breach of the agreement by the other party that is not cured
within 60 days of written notice from the non-breaching party or upon
declaration of bankruptcy by the other party.


                                       13
<PAGE>

AVENTIS LICENSE AGREEMENTS

         During 2002, we amended our license agreement with Aventis to reacquire
the rights to market and distribute ONCASPAR in the United States, Mexico,
Canada and the Asia/Pacific region. In return for the marketing and distribution
rights we paid Aventis $15.0 million and are obligated to pay a 25% royalty on
net sales of ONCASPAR through 2014. The license agreement may be terminated by
Aventis earlier upon 60 days' notice if we fail to make the required royalty
payments or we decide to cease selling ONCASPAR. Following the expiration of the
agreement in 2014, all rights will revert back to us, unless the agreement is
terminated earlier because we fail to make royalty payments or cease to sell
ONCASPAR. Prior to the amendment, Aventis was responsible for marketing and
distribution of ONCASPAR. Under the previous agreement, Aventis paid us a
royalty on net sales of ONCASPAR of 27.5% on annual sales up to $10.0 million
and 25% on annual sales exceeding $10.0 million. These royalty payments included
Aventis' cost of purchasing ONCASPAR from us under a supply agreement.

         The amended license agreement prohibits Aventis from making, using or
selling an asparaginase product in the U.S. or a competing PEG-asparaginase
product anywhere in the world until the later of the expiration of the agreement
or, if the agreement is terminated earlier, five years after termination. If we
cease to distribute ONCASPAR or if we fail to make the required royalty
payments, Aventis has the option to distribute the product in the territories
under the original license.

     MEDAC LICENSE AGREEMENT

         In January 2003, we renewed an exclusive license to Medac GmbH
("Medac"), a private company based in Germany, to sell ONCASPAR and any
PEG-asparaginase product developed by us or Medac during the term of the
agreement in most of Europe and part of Asia. Our supply agreement with Medac
provides for Medac to purchase ONCASPAR from us at certain established prices.
Under the license agreement, Medac is responsible for obtaining additional
approvals and indications in the licensed territories, beyond the currently
approved hypersensitive indication in Germany. Under the agreement, Medac is
required to meet certain minimum purchase requirements. The term of the
agreement is for five years and will automatically renew for an additional five
years if Medac meets or exceeds certain diligence requirements and thereafter
the agreement will automatically renew for an additional two years unless either
party provides written notice of its intent to terminate the agreement at least
12 months prior to the scheduled expiration date. Following the expiration or
termination of the agreement, all rights granted to Medac will revert back to
Enzon.

     INEX DEVELOPMENT AND COMMERCIALIZATION AGREEMENTS

         In January 2004, we entered into a strategic partnership with Inex
Pharmaceuticals Corporation ("Inex") to develop and commercialize Inex's
proprietary oncology product MARQIBO. In connection with the strategic
partnership we entered into a Product Supply Agreement, a Development Agreement,
and a Co-Promotion Agreement with Inex. The agreements contain cross termination
provisions under which termination of one agreement triggers termination of all
the agreements.

         Under the terms of the agreements, we receive the exclusive
commercialization rights for MARQIBO for all indications in the United States,
Canada and Mexico. The lead indication for MARQIBO is relapsed aggressive
non-Hodgkin's lymphoma (NHL) for which a New Drug Application (NDA) to the
United States Food and Drug Administration (FDA) was filed on March 15, 2004.
The product is also in numerous phase II clinical trials for several other
cancer indications, including first-line NHL.

         Upon execution of the related agreements we made a $12.0 million
up-front payment to Inex, which has been determined to be an acquisition of
in-process research and development as the payment was made prior to FDA
approval, and therefore expensed in our Statement of Operations for the quarter
ended March 31, 2004. In addition, we will be required to pay up to $20.0
million upon MARQIBO being approved by the FDA and development milestones and
sales-based bonus payments could total $43.75 million, of which $10.0 million is
payable upon annual sales first reaching $125.0 million, and $15.0 million is
payable upon annual sales first reaching $250.0 million. We will also be
required to pay Inex a percentage of commercial sales of MARQIBO and this
percentage will increase as sales reach certain predetermined thresholds.

We will share equally with Inex the future development costs to obtain and
maintain marketing approvals in North America for MARQIBO, and we will pay all
sales and marketing costs and certain other post-approval clinical development
costs typically associated with commercialization activities. We plan to market
MARQIBO to the oncology market through our North American sales force, which
currently markets ABELCET, ONCASPAR, and DEPOCYT. Inex has the option of
complementing our sales efforts by co-promoting MARQIBO through the formation of
a dedicated North American sales and medical science liaison force. The costs of
building Inex's co-promotion force will be shared equally by both companies and
we will record all sales in the licensed territories. Inex retains manufacturing
rights and we will reimburse Inex for the manufacture and supply of the drug at
manufacturing cost plus five percent.

                                       14
<PAGE>

         The agreements will expire on a country by country basis upon the
expiration of the last patent covering the licensed product in each particular
country or 15 years after the first commercial sale in such country, whichever
is later. The agreements are also subject to earlier termination under various
circumstances. We may terminate the agreements at any time upon 90 days notice,
in connection with which we must pay a $2.0 million termination fee. Inex has
completed the submission of its NDA, therefore if we terminate the agreement we
must pay the $2.0 million fee. In addition, if at any time we determine that it
has no interest in commercializing the product in any country, then Inex may
terminate the agreement with respect to such country. Either party may terminate
the agreements upon a material breach and failure to cure by the other party. In
addition, either party may terminate the agreements upon the other party's
bankruptcy. Generally, the termination of the agreements with respect to a
particular country shall terminate our license with respect to MARQIBO, and
preclude us from marketing the product, in that country. However, if we
terminate the agreements because of Inex's breach or bankruptcy, the licenses
granted by Inex will continue, Inex will be obligated to provide us a right of
reference to Inex's regulatory dossiers and facilitate a transfer to us of the
technology necessary to manufacture the product. In addition, after such
termination, Inex will be obligated to exercise commercially reasonable efforts
to ensure we have a continuous supply of product until we, exercising
commercially reasonable efforts, have secured an alternative source of supply.

         We may also explore the acquisition and joint development of other
cancer drugs with Inex.

     FRESENIUS DEVELOPMENT AND SUPPLY AGREEMENT

         In June 2003, we entered into a development and supply agreement with
Fresenius, which provides us with exclusive development and distribution rights
in North America for the polyclonal antibody preparation, ATG-FRESENIUS S. The
agreement term is ten years, commencing upon FDA approval of the first
indication for ATG-FRESENIUS S, with an option to extend the term for an
additional ten years. The agreement may be terminated early by us if we
determine the project not to be feasible. In addition, either party may
terminate the agreement early upon a material breach by the other party. If
Fresenius terminates the agreement upon a material breach by us, we will be
obligated to transfer to Fresenius any IND or marketing approval that we may
have obtained. Further, Fresenius may terminate the agreement if we fail to
satisfy the following diligence requirements: (i) enrollment of the first
patient for the first clinical trial within six months after the FDA has
approved an IND for the first indication; and (ii) receipt of marketing approval
in the U.S. within six years after the first IND is approved and the first
patient enrolled.

         Under this agreement, we are responsible for obtaining regulatory
approval of the product in the U.S. In September 2004, we made a milestone
payment to Fresenius of $1.0 million upon FDA approval of the first IND and we
are obligated to make another milestone payment of $1.0 million upon our
submission of a BLA to the FDA. Fresenius will be responsible for manufacturing
and supplying the product to us and we are required to purchase all of the
finished product from Fresenius for net sales of the product in North America.
We will purchase finished product at 40% of net sales, which percentage can be
reduced should certain defined sales targets be exceeded. We are required to
purchase a minimum of $2.0 million of product in the first year after commercial
introduction and $5.0 million in the second year, with no minimum purchase
requirements thereafter. Fresenius will supply the product to us without charge
for the clinical trials for the first indication. For subsequent trials, we will
purchase the clinical supplies from Fresenius.

     MICROMET ALLIANCE

         In April 2002, we entered into a multi-year strategic collaboration
with Micromet, a private company based in Munich, Germany, to identify and
develop the next generation of antibody-based therapeutics. In June 2004 we
amended this agreement and extended this collaboration until September 2007.
During the first phase of the collaboration, the partnership generated several
new SCA compounds against undisclosed targets in the fields of inflammatory and
autoimmune diseases. We extended our collaboration with Micromet to move the
first of these newly created SCAs toward clinical development. Under the terms
of the amended agreement, Enzon and Micromet will continue to share development
costs and future revenues for the joint development project.

         Following the termination or expiration of the agreement, the rights to
antibody-based therapeutics identified or developed by Enzon and Micromet will
be determined in accordance with the United States rules of inventorship. In
addition, we will acquire the rights to any PEGylation inventions. The agreement
can be terminated by either party upon a material breach of the agreement by the
other party.

                                       15
<PAGE>

         In addition to the research and development collaboration, in 2002 we
made an $8.3 million investment in Micromet in the form of a note of Micromet
which was amended in June 2004. This note bears interest of 3% and is payable in
March 2007. This note is convertible into Micromet Common Stock at a price of
15.56 euros per share at the election of either party. During the year ended
June 30, 2004 we recorded a write-down of the carrying value of this investment,
which resulted in a non-cash charge of $8.3 million.

         We hold core intellectual property in SCAs. These fundamental patents,
combined with Micromet's key patents in SCA linkers and fusion protein
technology, generate a compelling technology platform for SCA product
development. We have entered into a cross-license agreement with Micromet
regarding each of our respective SCA intellectual property estates and jointly
market our combined SCA technology to third parties. Micromet is the exclusive
marketing partner and is instituting a comprehensive licensing program on behalf
of the partnership. Any resulting revenues from the license agreements executed
by Micromet on behalf of the partnership will be used for Micromet's and our
joint SCA development activities. Several SCA molecules have been used in
clinical trials. Our licensee, Alexion is currently enrolling patients in a
pivotal Phase 3 trial in patients undergoing coronary artery bypass graft
surgery and a pivotal Phase 3 trial in patients experiencing acute myocardial
infarction (heart attack).

     NEKTAR ALLIANCE

         In January 2002, we entered into a broad strategic alliance with
Nektar, formerly Inhale Therapeutic Systems, Inc. that includes several
components.

         The companies entered into a product development agreement to jointly
develop three products to be specified over time using Nektar's Enhance(TM)
pulmonary delivery platform and SEDS(TM) supercritical fluids platform. Nektar
is responsible for formulation development, delivery system supply, and in some
cases, early clinical development. We have responsibility for most clinical
development and commercialization. This agreement terminates in January 2007
unless terminated earlier by either party upon 90 days notice of a material
breach or 15 days notice of a payment default. Upon termination of the
agreement, the obligations of the parties to conduct development activities will
expire, but such termination shall not affect rights of either party that have
accrued (e.g., with respect to the ownership of intellectual property or the
right to certain payments) prior thereto.

         The two companies will also explore the development of single-chain
antibody (SCA) products for pulmonary administration.

         We have also entered into a cross-license agreement with Nektar under
which each party cross-licensed to the other party certain patents. We also
granted Nektar the right to grant sub-licenses under certain of our PEG patents
to third parties. We will receive a royalty or a share of profits on final
product sales of any products that use our patented PEG technology. We receive
approximately 0.5% or less of Hoffmann-La Roche's sales of PEGASYS, which
represents equal profit sharing with Nektar on this product. There are currently
two PEG products licensed through our Nektar partnership that are being
evaluated in late-stage clinical trials, MACUGENTM (pegaptanib sodium
injection), for age-elated macular degeneration and diabetic macular edema, and
CDP870, an anti-TNF therapy for rheumatoid arthritis. We retain the right to use
all of our PEG technology and certain of Nektar's PEG technology for our own
product portfolio, as well as those products we develop in co-commercialization
collaborations with third parties. This agreement expires upon the later of the
expiration of the last licensed patent or the date the parties are no longer
required to pay royalties. Either party may terminate the agreement upon a
material breach of the agreement by the other party that is not cured within 90
days of the receipt of written notice from the non-breaching party or upon the
declaration of bankruptcy by the other party.

              We purchased $40 million of newly issued Nektar convertible
preferred stock in January 2002. The preferred stock is convertible into Nektar
common stock at a conversion price of $22.79 per share. In the event Nektar's
common stock price three years from the date of issuance of the preferred stock
or earlier in certain circumstances is less than $22.79, the conversion price
will be adjusted down, although in no event will it be less than $18.23 per
share. Conversion of the preferred stock into common stock can occur anywhere
from 1 to 4 years following the issuance of the preferred stock or earlier in
certain circumstances. As a result of a continued decline in the price of
Nektar's common stock, which the Company determined was other-than-temporary,
during December 31, 2002 the Company recorded a write-down of the carrying value
of its investment in Nektar, which resulted in a non-cash charge of $27.2
million. During the year ended June 30, 2004, we converted the preferred stock
into common stock and sold approximately 50% of our investment in Nektar, which
resulted in a net gain on investments of $11.0 million and cash proceeds of
$17.4 million. The two companies also agreed in January 2002 to a settlement of
the patent infringement suit we filed in 1998 against Nektar's subsidiary,
Shearwater Polymers, Inc. Nektar has a license under the contested patents
pursuant to the cross-license agreement. We received a one-time payment of $3.0
million from Nektar to cover expenses incurred in defending our branched PEG
patents.

                                       16
<PAGE>

     SKYEPHARMA AGREEMENTS

         In January 2003, we entered into a strategic alliance with SkyePharma,
PLC based on a broad technology access agreement. The two companies will draw on
their combined drug delivery technology and expertise to jointly develop up to
three products for future commercialization. These products will be based on
SkyePharma's proprietary platforms in the areas of oral, injectable and topical
drug delivery, supported by technology to enhance drug solubility and our
proprietary PEG modification technology, for which we received a $3.5 million
technology access fee. SkyePharma will receive a $2.0 million milestone payment
for each product based on its own proprietary technology that enters Phase 2
clinical development. Certain research and development costs related to the
technology alliance will be shared equally, as will future revenues generated
from the commercialization of any jointly-developed products.

         Effective December 31, 2002, we also licensed the North American rights
to SkyePharma's DEPOCYT(R), an injectable chemotherapeutic approved for the
treatment of patients with lymphomatous meningitis. Under the terms of the
agreement, we paid SkyePharma a license fee of $12.0 million. SkyePharma
manufactures DEPOCYT and we purchase finished product at 35% of net sales, which
percentage can be reduced should a defined sales target be exceeded. We have
recorded the $12.0 million license fee as an intangible asset, which is being
amortized over a ten year period.

         We were required to purchase minimum levels of finished product for
calendar year 2003 equal to 90% of the previous year's sales of DEPOCYT by
SkyePharma and are required to purchase finished product equal to $5.0 million
in net sales for each subsequent calendar year ("Minimum Annual Purchases")
through the remaining term of the agreement. SkyePharma is also entitled to a
milestone payment of $5.0 million if our sales of the product exceed a $17.5
million annual run rate for four consecutive quarters and an additional
milestone payment of $5.0 million if our sales exceed an annualized run rate of
$25.0 million for four consecutive quarters. We are also responsible for a $10.0
million milestone payment if the product receives approval for all neoplastic
meningitis prior to December 31, 2006. This milestone payment will be
incrementally reduced if the approval is received subsequent to December 31,
2006 to a minimum payment of $5.0 million for an approval after December 31,
2007.

         Our license is for an initial term of ten years and is automatically
renewable for successive two-year terms thereafter. Either party may terminate
the agreement early upon a material breach by the other party, which breach the
other party fails to cure within 60 days after receiving notice thereof.
Further, SkyePharma will be entitled to terminate the agreement early if we fail
to satisfy our Minimum Annual Purchases. In addition, we will be entitled to
terminate the agreement early if a court or government agency renders a decision
or issues an order that prohibits the manufacture, use or sale of the product in
the U.S. If a therapeutically equivalent generic product enters the market and
DEPOCYT's market share decreases, we will enter into good faith discussions in
an attempt to agree on a reduction in our payment obligations to SkyePharma and
a fair allocation of the economic burdens resulting from the market entry of the
generic product. If we are unable to reach an agreement within 30 days, then
either party may terminate the agreement, which termination will be effective
180 days after giving notice thereof. After termination of the agreement, we
will have no further obligation to each other, except the fulfillment of
obligations that accrued prior thereto (e.g., deliveries, payments, etc.). In
addition, for six months after any such termination, we will have the right to
distribute any quantity of product we purchased from SkyePharma prior to
termination.

     MEDEUS MANUFACTURING AGREEMENT

         On November 22, 2002, we acquired from Elan Corporation plc ("Elan")
the North American rights and operational assets associated with the
development, manufacture, sales and marketing of ABELCET for $360 million plus
acquisition costs. This transaction is being accounted for as a business
combination. As part of the ABELCET acquisition, we entered into a long-term
manufacturing and supply agreement with Elan, under which we continue to
manufacture two products ABELCET and MYOCET. In February 2004, Elan sold its
European sales and marketing business to Medeus Pharma Ltd. ("Medeus") and
transferred the manufacturing and supply agreement to Medeus. Under the terms of
the 2002 ABELCET acquisition agreement, Medeus has the right to market ABELCET
in any markets outside of the U.S., Canada and Japan. ABELCET is approved for
use in approximately 26 countries for primary and/or refractory invasive fungal
infections.

             Our agreement with Medeus, as successor to Elan, requires that we
supply Medeus with ABELCET and MYOCET through November 21, 2011. For the period
from November 22, 2002 until June 30, 2004, we supplied ABELCET and MYOCET at
fixed transfer prices which approximated our manufacturing cost. From July 1,
2004 to the termination of the agreement, we will supply these products at our
manufacturing cost plus fifteen percent.

                                       17
<PAGE>

             The agreement also provides that until June 30, 2004, we will
calculate the actual product manufacturing costs on an annual basis and, to the
extent that this amount is greater than the respective transfer prices, Medeus
will reimburse us for such differences. Conversely, if such actual manufacturing
costs are less than the transfer price, we will reimburse Medeus for such
differences.

         During February 2004 Elan Corporation, plc, sold its ABELCET and MYOCET
European business to Medeus Pharma, Ltd. ("Medeus"). As part of this transaction
the Company's long-term manufacturing and supply agreement with Elan was
assigned to Medeus. In connection with the closing of this sale the Company and
Elan settled a dispute over the manufacturing cost of products produced for Elan
resulting in the payment and recognition of manufacturing revenue related to
approximately $1.7 million of revenue not previously recognized given the
uncertainty of the contractual amount.

SALES AND MARKETING

         We have a North American sales and marketing team comprised of a
hospital-based sales force which markets ABELCET and a specialty oncology sales
force which markets ONCASPAR and DEPOCYT. In fiscal 2004, we began training each
sales force with respect to the other's product(s) and, leveraging existing
customer relationships, each sales force has begun to cross market the other's
product(s). We have provided exclusive marketing rights to Schering-Plough for
PEG-INTRON worldwide and to MEDAC GmbH for ONCASPAR in most of Europe and Asia.
We do not market any products through the use of direct-to-consumer advertising.

         ABELCET is utilized in North America by hospitals, clinics and
alternate care sites who treat patients with invasive fungal infections. In the
United States, ABELCET is sold primarily to drug wholesalers who, in turn, sell
the product to hospitals and certain other third parties. In some cases, ABELCET
is sold by us directly to institutions. We maintain contracts with a majority of
our customers which allows those customers to purchase product directly from
wholesalers. These contracts generally provide for pricing based on annual
purchase volumes.

         We market ONCASPAR and DEPOCYT in North America through our specialty
oncology sales force to hospital oncology centers, oncology clinics and oncology
physicians. We utilize an independent distributor in North America who sells the
products to these customers.

         We are marketing ADAGEN on a worldwide basis. We utilize independent
distributors in certain territories, including the United States, Europe and
Australia.

MANUFACTURING AND RAW MATERIALS

         In the manufacture of ABELCET, we combine amphotericin B with DMPC and
DMPG (two lipid materials) to produce an injectable lipid complex formulation of
amphotericin B. We currently have two suppliers of amphotericin B and have a
long-term supply agreement with our primary supplier, which is scheduled to
terminate on March 31, 2006. We also have two suppliers of the lipid materials,
neither of which is under a long term supply agreement. We believe that the
current levels of inventory that we maintain, coupled with having two suppliers
of materials, should provide us with sufficient time to find an alternative
supplier, if it becomes necessary.

         In the manufacture of ADAGEN and ONCASPAR, we combine activated forms
of PEG with unmodified proteins. We do not have a long-term supply agreement for
the raw polyethylene glycol material that we use in the manufacturing of our PEG
products. Instead, we maintain a level of inventory, which we believe should
provide us sufficient time to find an alternate supplier of PEG, in the event it
becomes necessary, without materially disrupting our business.

         ADAGEN and ONCASPAR use our early PEG technology which is not as
advanced as the PEG technology used in PEG-INTRON and our products under
development. Due, in part, to certain limitations of using our earlier PEG
technology, we have had and will likely continue to have certain manufacturing
problems with ADAGEN and ONCASPAR.

         Manufacturing and stability problems required us to implement voluntary
recalls for one batch of ADAGEN in March 2001 and certain batches of ONCASPAR in
June 2002, July 2004 and September 2004.During 1998, we began to experience
manufacturing problems with one of our FDA-approved products, ONCASPAR. The
problems were due to increased levels of white particulates in batches of
ONCASPAR, which resulted in an increased rejection rate for this product. During
fiscal 1999, we agreed with the FDA to temporary labeling and distribution
restrictions for ONCASPAR and instituted additional inspection and labeling
procedures prior to distribution. During May 1999, the FDA required us to limit
distribution of ONCASPAR to only those patients who are hypersensitive to native
L-asparaginase. As a result of certain manufacturing changes we made, the FDA
withdrew this distribution restriction in November 1999.

                                       18
<PAGE>

         In July 1999, the FDA conducted an inspection of our manufacturing
facility in connection with our product license for ADAGEN. Following that
inspection, the FDA documented several deviations from Current Good
Manufacturing Practices, known as cGMP, in a Form 483 report. We provided the
FDA with a corrective action plan. In November 1999, the FDA issued a warning
letter citing the same cGMP deviations listed in the July 1999 Form 483, but it
also stated that the FDA was satisfied with our proposed corrective actions. As
a result of the deviations, the FDA decided not to approve product export
requests from us for ONCASPAR until it determined that all noted cGMP deviations
were either corrected or in the process of being corrected. This restriction was
removed in August 2000.

         Since January 2000, the FDA and the MCA, the European equivalent of the
FDA, have conducted follow-up inspections as well as routine inspections of our
manufacturing facility related to ABELCET, ONCASPAR and ADAGEN. Following
certain of these inspections, the FDA has issued Form 483 reports, citing
deviations from cGMP. We received the most recent Form 483 reports in April 2004
for our New Jersey and Indianapolis manufacturing facilities. We have or are in
the process of responding to such reports with corrective action plans.

PATENTS AND INTELLECTUAL PROPERTY RIGHTS

         Patents are very important to us in establishing the proprietary rights
to the products we have developed or licensed. The patent position of
pharmaceutical or biotechnology companies, including our position, can be
uncertain and involve complex legal, scientific and factual questions. If our
intellectual property positions are challenged, invalidated or circumvented, or
if we fail to prevail in potential future intellectual property litigation, our
business could be adversely affected. We have been issued 114 patents in the
U.S., many of which have foreign counterparts. These patents, without
extensions, are expected to expire beginning in 2004 through 2022. We have also
filed and currently have pending 43 patent applications in the U.S. Under our
license agreements, we have access to large portions of Micromet's and Nektar's
patent estates as well as a small number of individually licensed patents. Of
the patents owned or licensed by us, 7 relate to PEG-INTRON, 17 relate to
ABELCET, 3 relate to DEPOCYT, 11 relate to Pegamotecan and 18 relate to MARQIBO.
Although we believe that our patents provide adequate protection for the conduct
of our business, we cannot assure you that such patents:

         o  will be of substantial protection or commercial benefit to us,

         o  will afford us adequate protection from competing products, or

         o  will not be challenged or declared invalid.

         We also cannot assure you that additional United States patents or
foreign patent equivalents will be issued to us.

         Patents for individual products extend for varying periods according to
the date of patent filing or grant and the legal term of patents in the various
countries where patent protection is obtained. The actual protection afforded by
a patent, which can vary from country to country, depends upon the type of
patent, the scope of its coverage and the availability of legal remedies in the
country.

         The expiration of a product patent or loss of patent protection
resulting from a legal challenge normally results in significant competition
from generic products against the covered product and, particularly in the U.S.,
can result in a significant reduction in sales of the pioneer product. In some
cases, however, we can continue to obtain commercial benefits from:

         o  product manufacturing trade secrets;

         o  patents on uses for products;

         o  patents on processes and intermediates for the economical
            manufacture of the active ingredients;

                                       19
<PAGE>

         o  patents for special formulations of the product or delivery
            mechanisms and conversion of the active ingredient to OTC products.

            The effect of product patent expiration or loss also depends upon:

         o  the nature of the market and the position of the product in it;

         o  the growth of the market;

         o  the complexities and economics of manufacture of the product; and

         o  the requirements of generic drug laws.

         The patent covering our original PEG technology, which we had licensed
from Research Corporation Technologies, Inc., contained broad claims covering
the attachment of PEG to polypeptides. However, this United States patent and
its corresponding foreign patents have expired. Based upon the expiration of the
Research Corporation patent, other parties may make, use, or sell products
covered by the claims of the Research Corporation patent, subject to other
patents, including those which we hold. We have obtained and intend to continue
to pursue patents with claims covering improved methods of attaching or linking
PEG to therapeutic compounds. We also have obtained patents relating to the
specific composition of the PEG-modified compounds that we have identified or
created. We will continue to seek such patents as we develop additional
PEG-enhanced products. We cannot assure you that any of these patents will
enable us to prevent infringement by unauthorized third parties or that
competitors will not develop competitive products outside the protection that
may be afforded by our patents.

         We are aware that others have also filed patent applications and have
been granted patents in the United States and other countries with respect to
the application of PEG to proteins and other compounds. Owners of any such
patents may seek to prevent us or our collaborators from making, using or
selling our products.

         During January 2002, we settled a patent infringement suit we had
brought against Shearwater Corporation Inc., a company that produces the
branched PEG, or U-PEG, used in Hoffmann-La Roche's product, PEGASYS, a
PEG-modified version of its alpha interferon product ROFERON-A. The settlement
was part of a broad strategic alliance we formed with Nektar, Shearwater
Corporation's parent corporation, in which Nektar agreed to pay us $3.0 million
to cover our expenses incurred in defending our branched PEG patents and pay us
50% of any revenues it receives for the manufacture of Hoffmann-La Roche's
PEGASYS. In addition, Enzon and Nektar agreed to cross license certain of their
PEG intellectual property estates to each other. Also, Nektar has the right to
sublicense certain of our PEG patents to third parties and we will receive a
royalty or a share of profit on final product sales. We retained the rights to
use our PEG patents for our own proprietary products and products we may develop
with co-commercialization partners.

         During August 2001, Schering-Plough granted a sublicense to Hoffmann-La
Roche under our branched PEG patents to allow Hoffmann-La Roche to make, use and
sell its pegylated alpha-interferon product, PEGASYS, as part of the settlement
of a patent infringement lawsuit related to PEG-INTRON. During August 2001, we
dismissed a patent infringement suit we had brought against Hoffmann-La Roche
relating to PEGASYS as a result of the sublicense by Schering-Plough of our
branched PEG patents for PEGASYS to Hoffmann-La Roche.

         In the field of SCA proteins, we have several United States and foreign
patents and pending patent applications, including a patent granted in August
1990 covering the genes needed to encode SCA proteins.

         In November 1993, Curis Inc. (formerly known as Creative BioMolecules
Inc.) signed cross-license agreements with us in the field of our SCA protein
technology and Curis' Biosynthetic Antibody Binding Site protein technology. In
July 2001, Curis reported that it had entered into a purchase and sale agreement
with Micromet AG, a German Corporation, pursuant to which Curis assigned its
single chain polypeptide technology to Micromet. In April 2002, we entered into
a cross-license agreement with Micromet for our respective SCA intellectual
property and have decided to jointly market such intellectual property with
Micromet.

         Through our acquisition of ABELCET, we acquired several U.S. and
Canadian patents claiming the use and manufacture of ABELCET.

         In general, Enzon has obtained licenses from various parties which it
deems to be necessary or desirable for the manufacture, use, or sale of its
products. These licenses generally require Enzon to pay royalties to the parties
on product sales. In addition, other companies have filed patent applications or
have been granted patents in areas of interest to Enzon. There can be no
assurance any licenses required under such patents will be available for license
on acceptable terms or at all.

                                       20
<PAGE>

         We also sell our products under trademarks that we consider in the
aggregate to be of material importance. Trademark protection continues in some
countries for as long as the mark is used and, in other countries, for as long
as it is registered. Registrations generally are for fixed, but renewable,
terms.

GOVERNMENT REGULATION

         The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements on the
clinical development, manufacture and marketing of pharmaceutical products.
These agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval and promotion of our
products. All of our products will require regulatory approval before
commercialization. In particular, therapeutic products for human use are subject
to rigorous preclinical and clinical testing and other requirements of the
Federal Food, Drug, and Cosmetic Act and the Public Health Service Act,
implemented by the FDA, as well as similar statutory and regulatory requirements
of foreign countries. Obtaining these marketing approvals and subsequently
complying with ongoing statutory and regulatory requirements is costly and time
consuming. Any failure by us or our collaborators, licensors or licensees to
obtain, or any delay in obtaining, regulatory approval or in complying with
other requirements, could adversely affect the commercialization of products
that we are then developing and our ability to receive product or royalty
revenues.

         The steps required before a new drug or biological product may be
distributed commercially in the United States generally include:

         o  conducting appropriate preclinical laboratory evaluations of the
            product's chemistry, formulation and stability, and animal studies
            to assess the potential safety and efficacy of the product,

         o  submitting the results of these evaluations and tests to the FDA,
            along with manufacturing information and analytical data, in an
            Investigational New Drug Application, or IND,

         o  making the IND effective after the resolution of any safety or
            regulatory concerns of the FDA,

         o  obtaining approval of Institutional Review Boards, or IRBs, to
            introduce the drug or biological product into humans in clinical
            studies,

         o  conducting adequate and well-controlled human clinical trials that
            establish the safety and efficacy of the drug or biological product
            candidate for the intended use, typically in the following three
            sequential, or slightly overlapping stages:

                        Phase I. The drug or biologic is initially introduced
                        into healthy human subjects or patients and tested for
                        safety, dose tolerance, absorption, metabolism,
                        distribution and excretion,

                        Phase II. The drug or biologic is studied in patients to
                        identify possible adverse effects and safety risks, to
                        determine dose tolerance and the optimal dosage, and to
                        collect initial efficacy data,

                        Phase III. The drug or biologic is studied in an
                        expanded patient population at multiple clinical study
                        sites, to confirm efficacy and safety at the optimized
                        dose, by measuring a primary endpoint established at the
                        outset of the study,

         o  submitting the results of preliminary research, preclinical studies,
            and clinical studies as well as chemistry, manufacturing and control
            information on the drug or biological product to the FDA in a New
            Drug Application, or NDA, for a drug product, or a Biologics License
            Application, or BLA, for a biological product, and

         o  obtaining FDA approval of the NDA or BLA prior to any commercial
            sale or shipment of the drug or biological product.

         An NDA or BLA must contain, among other things, data derived from
nonclinical laboratory and clinical studies which demonstrate that the product
meets prescribed standards of safety, purity and potency, and a full description
of manufacturing methods. The biological product may not be marketed in the
United States until a biological license is issued.

                                       21
<PAGE>

         The approval process can take a number of years and often requires
substantial financial resources. The results of preclinical studies and initial
clinical trials are not necessarily predictive of the results from large-scale
clinical trials, and clinical trials may be subject to additional costs, delays
or modifications due to a number of factors, including the difficulty in
obtaining enough patients, clinical investigators, drug supply, or financial
support. The FDA has issued regulations intended to accelerate the approval
process for the development, evaluation and marketing of new therapeutic
products intended to treat life-threatening or severely debilitating diseases,
especially where no alternative therapies exist. If applicable, this procedure
may shorten the traditional product development process in the United States.
Similarly, products that represent a substantial improvement over existing
therapies may be eligible for priority review with a target approval time of six
months. Nonetheless, approval may be denied or delayed by the FDA or additional
trials may be required. The FDA also may require testing and surveillance
programs to monitor the effect of approved products that have been
commercialized, and the agency has the power to prevent or limit further
marketing of a product based on the results of these post-marketing programs.
Upon approval, a drug product or biological product may be marketed only in
those dosage forms and for those indications approved in the NDA or BLA,
although information about off-label indications may be distributed in certain
circumstances.

         In addition to obtaining FDA approval for each indication for which the
manufacturer may market the drug, each domestic drug product manufacturing
establishment must register with the FDA, list its drug products with the FDA,
comply with Current Good Manufacturing Practices and permit and pass inspections
by the FDA. Moreover, the submission of applications for approval may require
additional time to complete manufacturing stability studies. Foreign
establishments manufacturing drug products for distribution in the United States
also must list their products with the FDA and comply with Current Good
Manufacturing Practices. They also are subject to periodic inspection by the FDA
or by local authorities under agreement with the FDA.

         Any products manufactured or distributed by us pursuant to FDA
approvals are subject to extensive continuing regulation by the FDA, including
record-keeping requirements and a requirement to report adverse experiences with
the drug. In addition to continued compliance with standard regulatory
requirements, the FDA also may require post-marketing testing and surveillance
to monitor the safety and efficacy of the marketed product. Adverse experiences
with the product must be reported to the FDA. Product approvals may be withdrawn
if compliance with regulatory requirements is not maintained or if problems
concerning safety or efficacy of the product are discovered following approval.

         The Federal Food, Drug, and Cosmetic Act also mandates that drug
products be manufactured consistent with Current Good Manufacturing Practices.
In complying with the FDA's regulations on Current Good Manufacturing Practices,
manufacturers must continue to spend time, money and effort in production,
record-keeping, quality control, and auditing to ensure that the marketed
product meets applicable specifications and other requirements. The FDA
periodically inspects drug product manufacturing facilities to ensure compliance
with Current Good Manufacturing Practices. Failure to comply subjects the
manufacturer to possible FDA action, such as:

         o  warning letters,

         o  suspension of manufacturing,

         o  seizure of the product,

         o  voluntary recall of a product,

         o  injunctive action, or

         o  possible civil or criminal penalties.

         To the extent we rely on third parties to manufacture our compounds and
products, those third parties will be required to comply with Current Good
Manufacturing Practices. We have undertaken a voluntary recall of certain lots
of products in the past, and future recalls and costs associated with Current
Good Manufacturing Practices are possible.

         Even after FDA approval has been obtained, and often as a condition to
expedited approval, further studies, including post-marketing studies, may be
required. Results of post-marketing studies may limit or expand the further
marketing of the products. If we propose any modifications to the product,
including changes in indication, manufacturing process, manufacturing facility
or labeling, an NDA or BLA supplement may be required to be submitted to the
FDA.

                                       22
<PAGE>

         Products manufactured in the United States for distribution abroad will
be subject to FDA regulations regarding export, as well as to the requirements
of the country to which they are shipped. These latter requirements are likely
to cover the conduct of clinical trials, the submission of marketing
applications, and all aspects of product manufacture and marketing. Such
requirements can vary significantly from country to country. As part of our
strategic relationships our collaborators may be responsible for the foreign
regulatory approval process of our products, although we may be legally liable
for noncompliance.

         We are also subject to various federal, state and local laws, rules,
regulations and policies relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with our research
work. Although we believe that our safety procedures for handling and disposing
of such materials comply with current federal, state and local laws, rules,
regulations and policies, the risk of accidental injury or contamination from
these materials cannot be entirely eliminated.

         We cannot predict the extent of government regulation which might
result from future legislation or administrative action. In this regard,
although the Food and Drug Administration Modernization Act of 1997 modified and
created requirements and standards under the Federal Food, Drug, and Cosmetic
Act with the intent of facilitating product development and marketing, the FDA
is still in the process of implementing the Food and Drug Administration
Modernization Act of 1997. Consequently, the actual effect of these developments
on our business is uncertain and unpredictable.

         Moreover, we anticipate that Congress, state legislatures and the
private sector will continue to review and assess controls on health care
spending. Any such proposed or actual changes could cause us or our
collaborators to limit or eliminate spending on development projects and may
otherwise impact us. We cannot predict the likelihood, nature or extent of
adverse governmental regulation that might result from future legislative or
administrative action, either in the United States or abroad. Additionally, in
both domestic and foreign markets, sales of our proposed products will depend,
in part, upon the availability of reimbursement from third-party payors, such as
government health administration authorities, managed care providers, private
health insurers and other organizations. Although Congress enacted the Medicare
Prescription Drug Modernization and Improvement Act of 2003, which established a
general Medicare outpatient prescription drug benefit beginning in 2006,
significant uncertainty often exists as to the reimbursement status of newly
approved health care products. In addition, third-party payors are increasingly
challenging the price and cost-effectiveness of medical products and services.
There can be no assurance that our proposed products will be considered
cost-effective or that adequate third-party reimbursement will be available to
enable us to maintain price levels sufficient to realize an appropriate return
on our investment in product research and development.

         We are also subject to federal and state laws regulating our
relationships with physicians, hospitals, third party payors of health care, and
other customers. The federal anti-kickback statute, for example, prohibits the
willful and knowing payment of any amount to another party with the intent to
induce the other party to make referrals for health care services or items
payable under any federal health care program. In recent years the federal
government has substantially increased enforcement and scrutiny of
pharmaceutical manufacturers with regard to the anti-kickback statute and other
federal fraud and abuse rules.

         PEG-INTRON was approved in the European Union and the United States for
the treatment of hepatitis C in May 2000 and January 2001, respectively. ABELCET
was approved in the United States in November 1995 and in Canada in September
1997. ONCASPAR was approved for marketing in the United States and Germany in
1994 and in Canada in December 1997 for patients with acute lymphoblastic
leukemia who are hypersensitive to native forms of L-asparaginase, and in Russia
in April 1993 for therapeutic use in a broad range of cancers. ADAGEN was
approved by the FDA in March 1990. DEPOCYT received U.S. approval in April 1999.
Except for these approvals, none of our other products have been approved for
sale and use in humans in the United States or elsewhere.

         With respect to patented products, delays imposed by the government
approval process may materially reduce the period during which we will have the
exclusive right to exploit them.

COMPETITION

     General

Competition in the biopharmaceutical industry is intense and based significantly
on scientific and technological factors. These factors include the availability
of patent and other protection of technology and products, the ability to
commercialize technological developments and the ability to obtain governmental
approval for testing, manufacturing and marketing. We compete with specialized
biopharmaceutical firms and large pharmaceutical companies in North America,
Europe and elsewhere, with respect to both research and development of product
candidates and commercialization of approved products. These companies, as well
as academic institutions, governmental agencies and private research
organizations, also compete with us in recruiting and retaining highly qualified
scientific personnel and consultants. All of the companies offering competing
products are larger than us and have substantially greater resources. Certain of
these companies, especially Merck and Pfizer, are able to compete effectively
with us largely by virtue of their superior resources and the market's
familiarity with their "brand names" regardless of the technical advantages or
disadvantages of their products.

                                       23
<PAGE>

     ABELCET

         The intravenous or IV anti-fungal market in which ABELCET competes is a
highly competitive market. The products used to treat fungal infections are
classified into four classes of drugs: CAB or Conventional Amphotericin B
lipid-based amphotericin B formulations, triazoles and echinocandins. While we
compete with all of these drugs, ABELCET is predominately used in more severely
ill patients.

         CAB is a broad-spectrum polyene anti-fungal agent that is believed to
act by penetrating the cell wall of a fungus, thereby killing it. In its
conventional form, amphotericin B is particularly toxic to the kidneys, an
adverse effect that often restricts the amount that can be administered to a
patient. CAB is sold today as a significantly lower cost generic drug. Its usage
has been declining, however, due to these toxicities.

         The lipid-based formulations of amphotericin B include ABELCET,
AMBISOME(R) (marketed by Fujisawa/Gilead) and AMPHOTEC(R) (marketed by
Intermune, Inc.). These formulations provide the efficacy of CAB while limiting
the toxicities that are inherent in CAB usage. AMBISOME has proven to be a
significant competitor to ABELCET. Recently, Fugisawa/Gilead has reduced the
price of AMBISOME in certain geographic markets, increasing the competitive
pressure on ABELCET. To the extent we are not able to address this competitive
pressure successfully or we deem it necessary to reduce the price of ABELCET in
order to address this competitive threat, market share or revenues or both could
decrease, which could have a material adverse effect on our business, financial
condition or results of operations.

         The triazoles, which include DIFLUCAN(R) (marketed by Pfizer),
SPORONOX(R) (marketed by Janssen Pharmaceuticals) and VFEND(R) (also marketed by
Pfizer) have the least reported incidence of side effects versus all other
antifungals. Triazoles are generally thought to be limited by a narrower
spectrum of activity and have issues with drug-to-drug interactions and acquired
resistance. The majority of triazole units sold in the U.S. are attributed to
DIFLUCAN. DIFLUCAN in particular is often used in "less compromised" patients as
prophylaxis or as first-line empirical therapy. DIFLUCAN patients are often
switched to an amphotericin B product once a clinician is convinced that a
patient has a fungal infection. VFEND is a second-generation triazole approved
in May 2002 and is available in intravenous and oral formulations. VFEND carries
a broader spectrum of activity than first generation triazoles and is indicated
for the treatment of invasive aspergillosis, scedosporium apiospermum and
fusariosis in patients intolerant of, or refractory to, other therapy. However,
it carries with it a narrower spectrum of activity versus CAB and the lipid
amphotericin B formulations, while also retaining the same potential for
drug-to-drug interactions and resistance issues as the first generation
triazoles.

         The newest class of products to enter the IV anti-fungal market are the
echinocandins. These exhibit fewer of the CAB side effects but, like the
triazoles, have a more limited spectrum of activity and less clinical data
supporting widespread use across a variety of fungal pathogens. CANCIDAS
(marketed by Merck) was approved in the U.S. in January 2001 and is the first
echinocandin to receive FDA approval. CANCIDAS is indicated for the treatment
invasive aspergillosis in patients who are refractory to or intolerant of other
therapies, esophageal candidiasis and candidemia. Additional echinocandin
products are in late-stage clinical development by pharmaceutical companies.

     PEGylation

         We are aware that other companies are conducting research on chemically
modified therapeutic proteins and that certain companies are modifying
pharmaceutical products, including proteins, by attaching PEG. In addition,
other companies have received FDA approval for PEGylated compounds, including,
Amgen's NEULASTA(R) (pegfilgrastin) and Pfizer's SOMAVERT(R) (pegvisomant for
injection). Other than PEG-INTRON, our ONCASPAR and ADAGEN products, Hoffmann-La
Roche's PEGASYS, Amgen's NEULASTA, and Pfizer's SOMAVERT, we are not aware of
any PEG-modified therapeutic proteins that are currently available commercially
for therapeutic use. Nevertheless, other drugs or treatments that are currently
available or that may be developed in the future, and which treat the same
diseases as those that our products are designed to treat, may compete with our
products.



                                       24
<PAGE>

     ADAGEN

         Prior to the development of ADAGEN, the only treatment available to
patients afflicted with adenosine deaminase or ADA-deficient SCID was a
well-matched bone marrow transplant. Completing a successful transplant depends
upon finding a matched donor, the probability of which is low. At present,
researchers at the NIH have been treating SCID patients with gene therapy, which
if successfully developed, would compete with, and could eventually replace
ADAGEN as a treatment. The theory behind gene therapy is that cultured
T-lymphocytes that are genetically engineered and injected back into the patient
will express the deficient adenosine deaminase enzyme permanently and at normal
levels. To date, patients in gene therapy clinical trials have not been able to
stop ADAGEN treatment and, therefore, the trials have been inconclusive.'

     ONCASPAR

         Current standard treatment of patients with acute lymphoblastic
leukemia includes administering unmodified L-asparaginase along with the drugs
vincristine, prednisone and daunomycin. Studies have shown that long-term
treatment with L-asparaginase increases the disease-free survival in high risk
patients. ONCASPAR, our PEG-modified L-asparaginase product, is used to treat
patients with acute lymphoblastic leukemia who are hypersensitive to unmodified
forms of L-asparaginase. Currently, there is one unmodified form of
L-asparaginase (ELSPAR(R)) available in the United States and several available
in Europe. We believe that ONCASPAR has two advantages over these unmodified
forms of L-asparaginase: increased circulating blood life and generally reduced
immunogenicity.

     PEG-INTRON

         The current market in the U.S. and Europe for PEGylated alpha
interferon products is highly competitive. PEG-INTRON, marketed by
Schering-Plough, competes directly with Hoffmann-La Roche's PEGASYS.
Schering-Plough and Hoffman-La Roche have been the major competitors in the
global alpha interferon market since the approval of their unmodified alpha
interferon products, INTRON A and ROFERON-A, respectively. Since its launch,
PEGASYS has taken market share away from PEG-INTRON, and the over all market for
pegylated alpha interferon in the treatment of Hepatitis C has not increased
enough to offset the effect the increasing PEGASYS sales have had on sales of
PEG-INTRON. As a result, quarterly sales of PEG-INTRON and the royalties we
receive on those sales have declined in recent quarters. We cannot assure you
that PEGASYS will not continue to gain market share at the expense of
PEG-INTRON, which could result in lower PEG-INTRON sales and royalties to us.

     DEPOCYT

         DEPOCYT competes against generic unmodified or Ara-C cytarabine, as
well as methotrexate, another generic drug, in the treatment of lymphomatous
meningitis. Both of these drugs have been used for oncology treatment for
decades and DEPOCYT does not have the same level of clinical experience as these
drugs. Clinical trials have demonstrated, however, that DEPOCYT provides certain
clinical advantages versus generic cytarabine. In a randomized, multi-center
trial of patients with lymphomatous meningitis, treated either with 50 mg of
DEPOCYT administered every 2 weeks or standard intrathecal chemotherapy
administered twice a week, results showed that DEPOCYT achieved a complete
response rate of 41% compared with a complete response rate of 6% for
unencapsulated cytarabine. In this study, complete response was prospectively
defined as (i) conversion of positive to negative CSF cytology and (ii) the
absence of neurologic progression. DEPOCYT has also demonstrated an increase in
the time to neurologic progression of 78.5 days for DEPOCYT versus 42 days for
unencapsulated cytarabine. There are no controlled trials, however, that
demonstrate a clinical benefit resulting from this treatment, such as
improvement in disease related symptoms, increased time to disease progression,
or increased survival.

     Products Under Development

         We are independently developing Pegamotecan and we are jointly
developing MARQIBO with our partner Inex for the treatment of patients with
gastric or gastroesophageal junction cancers and Non-Hodgkins Lymphoma ("NHL"),
who have failed or relapsed previous therapy or therapies, respectively.
Currently, there are no other FDA approved products for these indications. Any
product or technologies that are directly or indirectly successful in treating
NHL could negatively impact the market potential for MARQIBO. Any product or
technologies that are directly or indirectly successful in treating gastric and
gastroesophageal junction cancers could negatively impact the market potential
for Pegamotecan.

                                       25
<PAGE>

         ATG-FRESENIUS S will compete with Genzyme Corporation's THYMOGLOBULIN,
a polyclonal antibody already approved for the prevention of organ rejection in
kidney transplant patients, as well as several other antibody products marketed
by large pharmaceutical companies.

     SCA's

         There are several technologies which compete with our SCA protein
technology, including chimeric antibodies, humanized antibodies, human
monoclonal antibodies, recombinant antibody Fab fragments, low molecular weight
peptides and mimetics. These competing technologies can be categorized into two
areas:

those modifying monoclonal antibodies to minimize immunological reaction to a
foreign protein, which is the strategy employed with chimeric, humanized, and
human monoclonal antibodies, and

those creating smaller portions of monoclonal antibodies, such as Fab fragments
and low molecular weight peptides.

         We believe that the smaller size of our SCA proteins should permit
better penetration into the tumor, result in rapid clearance from the blood and
be suitable for fusion proteins, such as immunotoxins. A number of organizations
have active programs in SCA proteins. We believe that our patent position on SCA
proteins will likely require companies that have not licensed our SCA protein
patents to obtain licenses under our patents in order to commercialize their
products. We cannot be sure, however, that other companies will not develop
competing SCAs or other technologies that are not blocked by our SCA patents.

EMPLOYEES

         As of June 30, 2004, we employed 359 persons, including 32 persons with
Ph.D. or MD degrees. At that date, 80 employees were engaged in research and
development activities, 161 were engaged in manufacturing, 118 were engaged in
sales, marketing and administration. None of our employees are covered by a
collective bargaining agreement. All of our employees are covered by
confidentiality agreements. We consider our relations with our employees to be
good.

ITEM 2.  PROPERTIES

         As part of the ABELCET transaction, we assumed ownership of a 56,000
square foot manufacturing facility in Indianapolis, Indiana which produces
ABELCET along with other products we manufacture for others on a contract basis.
Our Indianapolis facility is not subject to any mortgage.

         The following are all of the facilities that we currently lease:
<TABLE>
<CAPTION>

                                                                   Approx.
                                                                   Square        Approx.
Location                                  Principal Operations     Footage     Annual Rent    Lease Expiration
--------                                  --------------------     -------     -----------    ----------------
<S>                                       <C>                      <C>         <C>            <C>
20 Kingsbridge Road Piscataway, NJ        Research & Development    56,000     $581,000(1)    July 31, 2021
300 Corporate Ct. S. Plainfield, NJ       Manufacturing             24,000     $183,000(2)    October 31, 2012
685 Route 202/206 Bridgewater, NJ         Administrative            25,000     $613,000(3)    January 31, 2008
</TABLE>
---------------

(1)   Under the terms of the lease, annual rent increases over the remaining
      term of the lease from $581,000 to $773,000.

(2)   Under the terms of the lease, annual rent increases over the remaining
      term of the lease from $183,000 to $228,000.

(3)   Under the terms of the lease, annual rent increases over the remaining
      term of the lease from $613,000 to $638,000.

         We believe that our facilities are well maintained and generally
adequate for our present and future anticipated needs.

ITEM 3. LEGAL PROCEEDINGS

         There is no pending material litigation to which we are a party or to
which any of our property is subject.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.


                                       26
<PAGE>



                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
         MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

         Our common stock is traded on the NASDAQ National Market under the
trading symbol "ENZN".

         The following table sets forth the high and low sale prices for our
common stock for the years ended June 30, 2004 and 2003, as reported by the
NASDAQ National Market. The quotations shown represent inter-dealer prices
without adjustment for retail markups, markdowns or commissions, and may not
necessarily reflect actual transactions.

                                                 High           Low
                                             -------------  -------------
YEAR ENDED JUNE  30, 2004
First Quarter                                    $13.90        $10.51
Second Quarter                                    12.52         10.28
Third Quarter                                     18.40         11.97
Fourth Quarter                                    16.20         10.86
YEAR ENDED JUNE  30, 2003
First Quarter                                     25.00         16.46
Second Quarter                                    20.90         15.50
Third Quarter                                     19.32         11.00
Fourth Quarter                                    15.68         11.16

         As of September 13, 2004, there were 1,566 holders of record of our
common stock.

         We have never declared or paid any cash dividends on our common stock
and do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth of
our business.

EQUITY COMPENSATION PLAN INFORMATION

         The following table sets forth information regarding outstanding
options and shares reserved for future insurance under our equity compensation
plans as of June 30, 2004 (in thousands, except per share data):


<TABLE>
<CAPTION>
                                                                                               Number of securities
                                                                                               remaining available
                                               Number of securities      Weighted-average      for future issuance
                                                 to be issued upon       exercise price of         under equity
                                                    exercise of             outstanding         compensation plans
                                               outstanding options,      options, warrants    (excluding securities
                Plan Category                   warrants and rights         and rights        reflected in column a)
                -------------                 ------------------------  --------------------  -----------------------
                                                        (a)                    (b)                   (c)
<S>                                           <C>                       <C>                   <C>
Equity compensation plans approved by
    security holders                                   4,838                  $25.90                   3,410
Equity compensation plans not approved by
    security holders                                       -                     -                       -
                                              ------------------------  --------------------  -----------------------
         Total                                         4,838                  $25.90                   3,410
                                              ========================  ====================  =======================

</TABLE>



                                       27
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

         Set forth below is our selected financial data for the five fiscal
years ended June 30, 2004.

         Consolidated Statement of Operations Data (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                                    Years Ended June 30,
                                            ---------------------------------------------------------------------
                                                 2004           2003          2002         2001          2000
                                            ---------------  -----------   -----------  -----------  ------------
                                            (Restated)(1)
<S>                                          <C>            <C>             <C>          <C>          <C>
Consolidated Statements of Operations Data:
 Total revenues                                $169,571       $146,406        $75,805      $31,588      $17,018
 Cost of sales                                   46,986         28,521          6,078        3,864        4,888
 Research and development expenses               34,769         20,969         18,427       13,052        8,383
 Write-down of carrying value of
         investment                               8,341         27,237              -            -            -
 Acquired in-process research and
         development                             12,000              -              -            -            -
 Other operating expenses                        60,433         39,782         16,687       11,796       12,956
 Operating income (loss)                          7,042         29,897         34,613        2,876       (9,209)
 Investment income, net                          13,396          8,942         18,681        8,401        2,943
 Interest expense                                19,829         19,828         19,829          275            4
 Other income (expense), net                      6,776         26,938          3,218           11          (36)
 Income tax provision (benefit)                   3,177            223         (9,123)        (512)           -
 Net earnings available for common
         stockholders                             4,208         45,726         45,806       11,525       (6,306)
 Net earnings per common shares
  Basic                                              $0.10        $1.06        $1.07        $0.28        ($0.17)
  Diluted                                            $0.10        $1.05        $1.04        $0.26        ($0.17)
</TABLE>


<TABLE>
<CAPTION>
                                                                            June 30,
                                            ---------------------------------------------------------------------
                                                 2004           2003          2002         2001         2000
                                            ---------------  -----------   -----------  -----------  ------------
                                            (Restated)(1)
<S>                                             <C>            <C>           <C>          <C>          <C>
Consolidated Balance Sheet Data:
 Current assets                                 $191,462       $152,847      $221,462     $455,521     $57,581
 Current liabilities                              31,664         34,345        19,701        9,410       8,172
 Total assets                                    722,410        728,566       610,748      549,675     130,252
 Other long-term obligations                       1,655          2,637           552        1,276       1,118
 Long-term debt                                  400,000        400,000       400,000      400,000           -
 Total stockholders' equity                      289,091        291,584       190,495      138,989     120,962
</TABLE>

----------------

(1)   The Company restated the financial statements to correct an error made in
      the application of hedge accounting for a zero cost protective collar
      arrangement under Statement of Financial Accounting Standards No. 133,
      Accounting for Derivative Instruments and Hedging Securities, as amended
      (SFAS No. 133).

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

COMPANY OVERVIEW

         We are a biopharmaceutical company that discovers, develops,
manufactures and markets enhanced therapeutics for life-threatening diseases
through the application of our proprietary technologies, as well as through
strategic transactions and partnerships. Our revenues are comprised of sales of
four FDA approved products as well as royalties on sales of products that use
our technology. In addition, we manufacture several products for other companies
in our manufacturing facility. Our expenditures relate to the development of
additional products under various stages of development, as well as costs
related to the sales and manufacture of our products.

RESTATEMENT OF FINANCIAL STATEMENTS

         The Company has restated its consolidated financial statements as of
and for the fiscal year ended June 30, 2004 as discussed in Note 2 in the
accompanying consolidated financial statements. The following management's
discussion and analysis takes into account the effects of the restatement.

                                       28
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Total cash reserves, including cash, cash equivalents and marketable
securities, as of June 30, 2004 were $186.2 million, as compared to $153.3
million as of June 30, 2003. The increase is primarily the result of net cash
provided by operations of $37.1 million, purchase of acquired in-process
research and development of $12.0 million and cash proceeds of $7.8 million
related to our sale of 880,075 shares of Nektar common stock and marketable
securities. We invest our excess cash primarily in United States
government-backed securities and investment-grade corporate debt securities.

         During the year ended June 30, 2004, net cash generated from operating
activities was $37.1 million, principally reflecting our net income of $4.2
million, a gain on the sale of equity securities of $14.1 million, depreciation
and amortization of $22.1 million, other non-cash charges of $11.5 million,
acquired in process research and development of $12.0 million, write-down of the
carrying value of Micromet of $8.3 million, and a net increase in operating
assets and liabilities of $2.0 million. During the year ended June 30, 2003, net
cash generated from operating activities was $58.2 million, primarily reflecting
our net income of $45.7 million and the effect of non-cash amounts for the
merger termination fee of $34.6 million, the write-down of the carrying value of
an investment of $27.2 million, depreciation and amortization of $13.3 million,
deferred taxes of $4.4 million, and an increase in our operating assets and
liabilities of $11.0 million. During the year ended June 30, 2002, net cash
generated from operating activities was $29.6 million, primarily reflecting our
net income of $45.8 million and the effect of non-cash amounts for the
depreciation and amortization, deferred taxes of $9.0 million, and increased
working capital of $7.2 million.

         Net cash used in investing activities totaled $12.8 million for the
year ended June 30, 2004 as compared to $106.4 million and $231.1 million for
the years ended June 30, 2003 and 2002, respectively. Cash provided by investing
activities during the year ended June 30, 2004 consisted of net proceeds from
marketable securities of $5.6 million, which was offset by cash used in
investing activities of $6.4 million for purchases of property and equipment and
$12.0 million for acquired in process research and development. Cash used in
investing activities during the year ended June 30, 2003 related to $11.2
million for purchases of property and equipment, $369.3 million for the
acquisition of the North American ABELCET business, and $12.2 million for the
North American license of DEPOCYT. These items were partly offset by net
proceeds from marketable securities totaling $286.3 million for the year ended
June 30, 2003. Cash used in investing activities for the year ended June 30,
2002 related to $7.5 million for purchases of property and equipment, $15.0
million of product rights related to the reacquisition of ONCASPAR, and $48.3
million of other investments. These items were offset by net purchases of
marketable securities of $160.3 million.

         Net cash provided by financing activities for the years ended June 30,
2004, 2003, and 2002 was $527,000, $1.1 million, and $5.1 million, respectively.
Financing activities for the year ended June 30, 2004 were related to proceeds
from common stock issued under our stock option plans. Financing activities for
the year ended June 30, 2003 were primarily related to proceeds from common
stock issued under our stock options plans and payment of preferred stock
dividends. Financing activity for the year ended June 30, 2002 was related to
proceeds from common stock issued under our stock option plans.

         As of June 30, 2004, we had $400.0 million of 4.5% convertible
subordinated notes outstanding. The notes bear interest at an annual rate of
4.5%. Interest is payable on January 1 and July 1 of each year. Accrued interest
on the notes was $9.0 million as of June 30, 2004. The holders may convert all
or a portion of the notes into common stock at any time on or before July 1,
2008. The notes are convertible into our common stock at a conversion price of
$70.98 per share, subject to adjustment in certain events. The notes are
subordinated to all existing and future senior indebtedness. On or since July 7,
2004, we may redeem any or all of the notes at specified redemption prices, plus
accrued and unpaid interest to the day preceding the redemption date. The notes
will mature on July 1, 2008 unless earlier converted, redeemed at our option or
redeemed at the option of the note-holder upon a fundamental change, as
described in the indenture for the notes. Neither we nor any of our subsidiaries
are subject to any financial covenants under the indenture. In addition, neither
we nor any of our subsidiaries are restricted under the indenture from paying
dividends, incurring debt, or issuing or repurchasing our securities.

              In August 2003, the Company entered into a Zero Cost Protective
Collar arrangement with a financial institution to reduce the exposure
associated with the 1.5 million shares of common stock of NPS Pharmaceuticals,
Inc. ("NPS") which the Company received as part of a merger termination
agreement with NPS. The Collar will mature in four separate three-month
intervals from November 2004 through August 2005, at which time the Company will
receive the proceeds from the sale of the securities which we estimate with
consideration to the Collar to be $29.9 million to $38.0 million. The amount due
at each maturity date will be determined based on the market value of NPS common
stock on such maturity date. The contract requires the Company to maintain a
minimum cash balance of $30.0 million and additional collateral up to $10.0
million (as defined) under certain circumstances with the financial institution.
The strike prices of the put and call options are subject to certain adjustments
in the event the Company receives a dividend from NPS.

                                       29
<PAGE>

         Our current sources of liquidity are our cash reserves; interest earned
on such cash reserves; short-term investments; marketable securities; sales of
ADAGEN(R), ONCASPAR(R), DEPOCYT(R) and ABELCET(R); and royalties earned, which
are primarily related to sales of PEG-INTRON(R); and contract manufacturing
revenue. Based upon our current planned research and development activities and
related costs and our current sources of liquidity, we anticipate our current
cash reserves and expected cash flow from operations will be sufficient to meet
our capital, debt service and operational requirements for the foreseeable
future.

         While we believe that our cash, cash reserves and investments will be
adequate to satisfy our capital needs for the foreseeable future, we may seek
additional financing, such as through future offerings of equity or debt
securities or agreements with collaborators with respect to the development and
commercialization of products, to fund future operations and potential
acquisitions. We cannot assure you, however, that we will be able to obtain
additional funds on acceptable terms, if at all.

OFF-BALANCE SHEET ARRANGEMENTS

         As part of our ongoing business, we do not participate in transactions
that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities ("SPE"), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow limited purposes. As of June 30, 2004 we are not involved in any SPE
transactions.

CONTRACTUAL OBLIGATIONS

         Our major outstanding contractual obligations relate to our operating
leases, inventory purchase commitments, our convertible debt and our license
agreements with collaborative partners.

         As of June 30, 2004, we had $400.0 million of convertible subordinated
notes outstanding. The notes bear interest at an annual rate of 4.5%. Interest
is payable on January 1 and July 1 of each year beginning January 2, 2002.
Accrued interest on the notes was $9.0 million as of June 30, 2004 (which was
paid on July 1, 2004). The holders may convert all or a portion of the notes
into common stock at any time on or before July 1, 2008. The notes are
convertible into our common stock at a conversion price of $70.98 per share,
subject to adjustment in certain events. The notes are subordinated to all
existing and future senior indebtedness. On or after July 7, 2004, we may redeem
any or all of the notes at specified redemption prices, plus accrued and unpaid
interest to the day preceding the redemption date. The notes will mature on July
1, 2008 unless earlier converted, redeemed at our option or redeemed at the
option of the note-holder upon a fundamental change, as described in the
indenture for the notes. Neither we nor any of our subsidiaries are subject to
any financial covenants under the indenture. In addition, neither we nor any of
our subsidiaries are restricted under the indenture from paying dividends,
incurring debt or issuing or repurchasing our securities.

         We have a multi-year strategic collaboration with Micromet, a private
company, to combine our patent estates and complementary expertise in
single-chain antibody (SCA) technology to create a leading platform of
therapeutic products based on antibody fragments. We have an obligation to fund
50% of research and development expenses for certain activities relating to SCA
for the collaboration through September 2007.

         We have a multi-year strategic alliance with Nektar whereby the
companies have entered into a product development agreement to jointly develop
three products to be specified over time using Nektar's enhance pulmonary
delivery platform and supercritical fluids platform. We have an obligation to
fund most clinical development and commercialization costs for the collaboration
through January 2007.

         Our strategic alliance with SkyePharma PLC ("SkyePharma") provides for
the two Companies to combine their drug delivery technology and expertise to
jointly develop up to three products for future commercialization. Research and
development costs related to the jointly developed products will be shared
equally based on an agreed upon annual budget, and future revenues generated
from the commercialization of jointly-developed products will also be shared
equally. In addition, SkyePharma is entitled to a $2.0 million milestone payment
for each product based on its own proprietary technology that enters Phase 2
clinical development.

         Under our exclusive license for the right to sell, market and
distribute SkyePharma's DEPOCYT product, we are required to purchase minimum
levels of finished product for calendar 2003 of 90% of the previous year sales
by SkyePharma and a sales level of $5.0 million for each subsequent calendar
year. SkyePharma is also entitled to a milestone payment of $5.0 million if our
sales of the product exceed a $17.5 million annualized run rate for four
consecutive quarters and an additional milestone payment of $5.0 million if
Enzon's sales exceed an annualized run rate of $25 million for four consecutive
quarters. We are also responsible for a $10.0 million milestone payment if the
product receives approval for all neoplastic meningitis prior to December 31,
2006. This milestone payment is incrementally reduced if the approval is
received subsequent to December 31, 2006 to a minimum payment of $5.0 million
for an approval after December 31, 2007.

                                       30
<PAGE>

         Under our agreement with Fresenius Biotech ("Fresenius") we are
responsible for North American clinical development, approval, and
commercialization of ATG-FRESENIUS S. In September 2004, the Company made a $1.0
million milestone payment to Fresenius upon FDA approval of an Investigational
New Drug Application. We are obligated to make another milestone payment of $1.0
million upon submission of a Biologics License Application. Upon the
commercialization of the product in North America, we will purchase the finished
product from Fresenius at a specified percentage of net sales.

         During January 2004, we entered into a strategic partnership with Inex.
We are obligated to make a milestone payment of up to $20.0 million to Inex upon
MARQIBO receiving accelerated approval from the FDA. Additional development
milestones and sales-based bonus payments could total $43.75 million, of which
$10.0 million is payable upon annual sales first reaching $125.0 million and
$15.0 million is payable upon annual sales first reaching $250.0 million. Inex
will also receive a percentage of commercial sales of MARQIBO and this
percentage will increase as sales reach certain predetermined thresholds.

         The Company leases three facilities in New Jersey. Total future minimum
lease payments and commitments for operating leases total $15.7 million.

         Contractual obligations represent future cash commitments and
liabilities under agreements with third parties, and exclude contingent
liabilities for which we cannot reasonably predict future payment.

         The following chart represents our contractual cash obligations
aggregated by type as of June 30, 2004 (in millions):

<TABLE>
<CAPTION>
                                                                      Payments due by period
                                             -----------------------------------------------------------------------------
Contractual Obligations and Commercial                        Less than 1                                     More than 5
Commitments                                     Total            Year        2 - 3 Years     4 - 5 Years         years
---------------------------------------       ----------      ----------     -----------     -----------      ----------
<S>                                           <C>             <C>             <C>             <C>             <C>
Long-term debt including current portion      $    400.0      $       --      $       --      $    400.0      $       --
Operating lease obligations                         15.7             1.5             2.9             2.1             9.2
Inventory purchase obligations                      45.0             5.0            10.0            10.0            20.0
Interest due on long-term debt                      81.0            18.0            36.0            18.0             9.0
                                              ----------      ----------      ----------      ----------      ----------
Totals                                        $    541.7       $    24.5       $    48.9      $    430.1       $    38.2
                                              ==========      ==========      ==========      ==========      ==========
</TABLE>


         The table does not include milestone commitments of $60.6 million which
are only payable upon the occurrence of future events.

FISCAL YEARS ENDED JUNE 30, 2004, 2003, AND 2002

         Revenues. Total revenues for the year ended June 30, 2004 were $169.6
million compared to $146.4 million for the year ended June 30, 2003 and $75.8
million for the year ended June 30, 2002. The components of revenues are product
sales, contract manufacturing revenue, royalties we earn on the sale of our
products by others, and contract revenues.

         Net product sales for the year ended June 30, 2004 increased by 82% to
$107.9 million compared to $59.3 million for the year ended June 30, 2003. The
increase in sales was due to increased sales of each of our four internally
marketed products: ABELCET(R), DEPOCYT(R), ADAGEN(R) and ONCASPAR(R). During
November 2002, we acquired the North American ABELCET business from Elan. During
the year ended June 30, 2004, we recorded sales of ABELCET in North America of
$67.7 million for the year ended June 30, 2004, as compared to $28.4 million for
the year ended June 30, 2003. During January 2003, we obtained an exclusive
license for the right to sell, market, and distribute SkyePharma's DEPOCYT in
North America. During the year ended June 30, 2004, we recorded DEPOCYT sales of
$5.0 million as compared to $2.5 million for year ended June 30, 2003. The
increase in net sales of ABELCET and DEPOCYT was principally due to the
acquisition of the product during the year ended June 30, 2003. Sales of
ONCASPAR increased by 46% to $18.1 million for the year ended June 30, 2004 from
$12.4 million for the year ended June 30, 2003. This was a result of additional
sales and marketing efforts to support ONCASPAR. In June 2002, we reacquired the
North American rights to market and distribute ONCASPAR in North America for
certain territories which were previously licensed to Aventis. Sales of ADAGEN
increased by 7% for the year ended June 30, 2004 to $17.1 million, as compared
to $16.0 million for the year ended June 30, 2003 due to an increase in the
number of patients receiving the drug.


                                       31
<PAGE>

         Net product sales increased by 167% to $59.3 million for the year ended
June 30, 2003 from $22.2 million for the year ended June 30, 2002. The increase
in net sales was due to the commencement of sales of ABELCET in North America in
November 2002 and DEPOCYT(R) in January 2003, and increased sales of ADAGEN and
ONCASPAR. During the year ended June 30, 2003, we recorded $28.4 million related
to sales of ABELCET in North America. During the year ended June 30, 2003, we
recorded DEPOCYT sales of $2.5 million. Sales of ONCASPAR increased by 43% to
$12.4 million for the year ended June 30, 2003, compared to $8.7 million for the
year ended June 30, 2002. In June 2002, we reacquired the rights to market and
distribute ONCASPAR in North America and certain other territories, which we
previously exclusively licensed to Aventis. Sales of ADAGEN increased by 19% for
the year ended June 30, 2003 to $16.0 million, as compared to $13.5 million for
the year ended June 30, 2002 due to an increase in the number of patients
receiving the drug.

         Contract manufacturing revenue for the year ended June 30, 2004 was
$12.9 million, as compared to $8.7 million for the comparable period of the
prior year. Contract manufacturing revenue is related to the manufacture and
sale of ABELCET for the international market and other contract manufacturing
revenue. As part of the ABELCET acquisition in November 2002, we entered into a
long-term manufacturing and supply agreement with Elan, under which we continue
to manufacture two products, MYOCET and ABELCET for the European market. During
February 2004, Elan sold its European sales and marketing business to Medeus
Pharma Ltd ("Medeus") and transferred the manufacturing and supply agreement to
Medeus. Approximately $1.7 million of the $12.9 million of revenues recorded
during the year ended June 30, 2004 related to a payment of $1.7 million from
Elan for invoices that had been previously disputed by Elan and therefore, not
previously recognized as revenue.

         Contract manufacturing revenue for the year ended June 30, 2003 is
related to the manufacture and sale of ABELCET for the international market and
other contract manufacturing revenue, which began in November 2002 as part of
the ABELCET acquisition. Contract manufacturing revenue for the year ended June
30, 2003 was $8.7 million.

         Royalties for the year ended June 30, 2004 decreased to $47.7 million
compared to $77.6 million for the year ended June 30, 2003. The decrease was
primarily due to decreased sales of PEG-INTRON by Schering-Plough, our marketing
partner, due to competitive pressure from the competing pegylated alpha
interferon product, PEGASYS(R), which Hoffmann-La Roche launched as a
combination therapy for hepatitis C in December 2002.

         Royalties for the year ended June 30, 2003 increased to $77.6 million
as compared to $53.3 million for the year ended June 30, 2002. The increase was
primarily due to the increased sales by Schering-Plough, our marketing partner,
of PEG-INTRON in combination with REBETOL in the U.S. and increased sales of
PEG-INTRON in Europe.

         Due to the competitive pressure from PEGASYS, we believe royalties from
sales of PEG-INTRON may continue to decrease in the near term. This decrease may
be offset by the potential launch of PEG-INTRON in combination with REBETOL in
Japan. In April 2004, Schering-Plough announced a New Drug Application was filed
in Japan for PEG-INTRON combination therapy. Since its launch, PEGASYS has taken
market share away from PEG-INTRON in the U.S. and Europe and the overall market
for pegylated alpha interferon in the treatment of hepatitis C has not increased
enough to offset the effect PEGASYS sales have had on sales of PEG-INTRON. As a
result, quarterly sales of PEG-INTRON and the royalties we receive on those
sales have declined in recent quarters. We cannot assure you that PEGASYS will
not continue to gain market share at the expense of PEG-INTRON, which could
result in lower PEG-INTRON sales and royalties to us.

         Based on our focused marketing efforts for ABELCET we believe that we
have been able to stabilize the pressure from the introduction of new products
in the antifungal market, namely Pfizer's VFEND(R) and Merck's CANCIDAS(R).
Given the highly competitive landscape of the antifungal market, we expect
ABELCET to have modest growth over the next year.

         We expect ADAGEN sales to grow over the next year at similar levels to
those achieved for the year ended June 30, 2004. We expect ONCASPAR sales to
continue to grow, but at a pace slower then the 46% growth rate achieved in
fiscal 2004. ONCASPAR sales may decline if we are unable to correct certain
manufacturing problems that have caused us to recall two lots in recent months.
We expect DEPOCYT sales to gain modestly from the current sales level of
approximately $1.0 million to $1.2 million per quarter. However, we cannot
assure you that any particular sales levels of ABELCET, ADAGEN, ONCASPAR,
DEPOCYT or PEG-INTRON will be achieved or maintained.

         Contract revenues for the year ended June 30, 2004 increased to $1.0
million as compared to $811,000 for the year ended June 30, 2003 and $293,000
for the year ended June 30, 2002. The increase was due to the recognition of
revenue over the entire fiscal year related to payments received from the
licensing of our PEG technology to SkyePharma. In connection with such
licensing, we received a payment of $3.5 million in January 2003, which is being
recognized into income based on the term of the related agreement.

                                       32
<PAGE>

         We had export sales and royalties recognized on export sales of $44.3
million for the year ended June 30, 2004, $40.2 million for the year ended June
30, 2003 and $26.3 million for the year ended June 30, 2002. Of these amounts,
sales in Europe and royalties recognized on sales in Europe, were $34.7 million
for the year ended June 30, 2004, $35.5 million for the year ended June 30, 2003
and $24.9 million for the year ended June 30, 2002.

         Cost of Sales and Manufacturing Revenue. Cost of sales and
manufacturing revenue, as a percentage of net product sales and manufacturing
revenue, decreased to 39% for the year ended June 30, 2004 as compared to 42%
for the year ended June 30, 2003. The decrease was principally due to the higher
2003 inventory costs as a result of certain purchase accounting adjustments to
the inventory acquired with the ABELCET acquisition, which was sold during the
year ended June 30, 2003, as well as manufacturing revenue with no related costs
due to a payment of $1.7 million from Elan for invoices that had been previously
disputed by Elan and therefore not previously recognized as income.

         Cost of sales and manufacturing revenue, as a percentage of net product
sales and manufacturing revenue, for the year ended June 30, 2003 was 42% as
compared to 27% in 2002. The increase was due to higher cost of sales for
ABELCET due to certain purchase accounting adjustments to the acquired inventory
totaling $8.6 million and as a result of unabsorbed capacity costs. The increase
was also due to our reacquisition of ONCASPAR, which resulted in increased cost
of sales for the product. Under the reacquisition agreement, we made a $15.0
million payment to Aventis in June 2002 and we pay Aventis 25% royalty on net
sales of ONCASPAR. The royalty and amortization of the $15.0 million payment
over a 14 year period are included in cost of sales for the product, accounting
for an increase in cost of sales as a percentage of sales.

         Research and Development. Research and development expenses increased
by $13.8 million or 66% to $34.8 million for the year ended June 30, 2004, as
compared to $21.0 million for the same period last year. The increase was
primarily due to (i) increased spending of approximately $2.5 million related to
our single chain antibody collaboration with Micromet AG; (ii) increased
spending on our two late stage development programs, Pegamotecan of
approximately $1.2 million and ATG Fresenius S, of approximately $3.0 million;
(iii) increased spending of approximately $2.0 million related to our strategic
partnership with Inex on Inex's proprietary oncology product MARQIBO; (iv)
increased preclinical spending of $1.7 million; and (v) increased
personnel-related expenses of approximately $3.4 million.

         Research and development expenses for the year ended June 30, 2003
increased by $2.6 million or 14% to $21.0 million as compared to $18.4 million
in 2002. The increase was primarily due to (i) increased spending of
approximately $1.7 million related to our single chain antibody collaboration
with Micromet AG; (ii) increased spending on our two late stage development
programs, Pegamotecan and ATG FRESENIUS S, of approximately $1.4 million. These
increases were partially offset by a decrease of approximately $500,000 in costs
as a result of our January 2003 decision to suspend our PEG-paclitaxel program.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 2004 increased by $16.4
million to $47.0 million, as compared to $30.6 million in 2003. The increase was
primarily due to (i) increased sales and marketing expenses of approximately
$11.3 million related to the hiring of our North American sales force in
connection with our acquisition of ABELCET; (ii) increased sales and marketing
expense of approximately $2.7 million related to the continued build out of a
sales and marketing presence in oncology for ONCASPAR and DEPOCYT; and (iii)
increased costs of approximately $2.4 million that were primarily attributable
to personnel-related expenses.

         Selling, general and administrative expenses for the year ended June
30, 2003 increased by $14.1 million to $30.6 million, as compared to $16.5
million in 2002. The increase was primarily due to (i) increased sales and
marketing expense of approximately $10.8 million related to the acquisition of
ABELCET and the subsequent hiring of our North American sales force; (ii)
increased sales and marketing expense of approximately $4.2 million due to the
reacquisition of marketing and distribution rights for ONCASPAR from Aventis and
the subsequent establishment of a sales and marketing presence in oncology; and
(iii) increased costs of approximately $626,000 that were primarily attributable
to personnel-related expenses. These increases were partially offset by a
reduction in legal expense of approximately $1.5 million related to the
settlement of the prior year's patent litigation with Nektar. During January
2002, we settled our patent infringement suit with Nektar and entered into a
broad collaboration.

         Amortization. Amortization expense increased to $13.4 million for the
year ended June 30, 2004, as compared to $9.2 million for the year ended June
30, 2003 and $142,000 for the year ended June 30, 2002, as a result of the
intangible assets acquired in connection with the ABELCET acquisition during
November 2002. Amortization of intangible assets is provided over their
estimated lives ranging from 3-15 years on a straight-line basis.

                                       33
<PAGE>

         Acquired In-Process Research and Development. Acquired in-process
research and development for the year ended June 30, 2004 of $12.0 million was
due to an up-front payment to Inex related to the execution of our strategic
partnership and related agreements entered into with Inex related to MARQIBO (a
development-stage product).

         Write-down of investment. During the year ended June 30, 2004, we
recorded a write-down of the carrying value of our investment in Micromet, which
resulted in a non-cash charge of $8.3 million. In April 2002, we entered into a
multi-year strategic collaboration with Micromet, which was amended in June
2004, to identify and develop antibody-based therapeutics. We made an $8.3
million investment into Micromet in the form of a convertible note due to Enzon
that is payable in March 2007 and bears interest at 3%. This note is convertible
into Micromet common stock at the election of either party. We based our
decision to write-down the note due an other-than-temporary decline in the
estimated fair value of this investment.

         In January 2002, we entered into a broad strategic alliance with Nektar
to co-develop products utilizing both companies' proprietary drug delivery
platforms. As a part of this agreement, we purchased $40.0 million of newly
issued Nektar convertible preferred stock which is currently convertible into
Nektar common stock at a conversion price of $22.79 per share. Under the cost
method of accounting, investments are carried at cost and are adjusted only for
other-than-temporary declines in fair value, and additional investments. As a
result of a continued decline in the price of Nektar's common stock, which was
determined to be other-than-temporary, we recorded a write-down of the carrying
value of our investment in Nektar, which resulted in a non-cash charge of $27.2
million. The adjustment was calculated based on an assessment of the fair value
of the investment at the time of the write-down.

         The estimated fair value of the Nektar preferred stock was determined
by multiplying the number of shares of common stock that would be received based
on the conversion rate in place as of the date of the agreement, ($22.79 per
share) by the closing price of Nektar common stock on December 31, 2002, less a
10% discount to reflect the fact that the shares were not convertible as of
December 31, 2002, the valuation date.

         Other income (expense). Other income (expense) for the year ended June
30, 2004 was income of $343,000, as compared to other income of $16.1 million
for the year ended June 30, 2003. Other income (expense) includes: net
investment income, interest expense, and other income.

         Net investment income for the year ended June 30, 2004 increased by
$4.5 million to $13.4 million for the year ended June 30, 2004, as compared to
$8.9 million for the year ended June 30, 2003. The increase was primarily due to
a net realized gain of $11.0 million principally related to the sale of
approximately 50% of the Company's investment in Nektar. The increase was
partially offset by a decrease in our interest-bearing investment as a result of
our previous years purchase of the North American rights to ABELCET in November
2002 for a cash payment of $360.0 million plus acquisition costs, as well as a
decrease in interest rates.

         Net investment income for the year ended June 30, 2003 decreased by
$9.8 million to $8.9 million for the year ended June 30, 2003, as compared to
$18.7 million for the year ended June 30, 2002. The decrease was primarily due
to a reduction in our interest-bearing investments resulting from our purchase
of the North American rights to ABELCET in November 2002 for a cash payment of
$360.0 million plus acquisition costs, as well as a decrease in interest rates.

         Interest expense was $19.8 million for each of the years ended June 30,
2004, 2003, and 2002. Interest expense is related to $400.0 million in 4.5%
convertible subordinated notes, which were outstanding for each of the periods.

         During the year ended June 30, 2003, we recorded NPS merger termination
income of $26.9 million. This amount reflects the aggregate consideration of
$34.6 million we received related to the mutual termination of our proposed
merger with NPS Pharmaceuticals, Inc. in June 2003 net of $7.7 million in costs
incurred related to the proposed merger with NPS (primarily investment banking,
legal, and accounting fees).

         Other income (expense) is primarily related to the 1.5 million shares
of NPS common stock we received under a June 2003 merger termination agreement
and a financial instrument we formed to reduce our exposure to the change in
fair value associated with such shares, specifically a zero cost protective
collar arrangement (the "Collar.") For the year ended June 30, 2004, other
income (expense) was income of $6.8 million, as compared to other income of
$40,000 for the year ended June 30, 2003. During the year ended June 30, 2004,
we recognized (i) an unrealized gain of $2.3 million related to the change in
the fair value of our NPS common stock (ii) a realized gain of $2.4 million
related to the sale and repurchase of 1.1 million shares of NPS common stock,
and (iii) an unrealized gain of $1.7 million related to change in the fair value
of the Collar. There was $40,000 of other miscellaneous non-operating income for
the year ended June 30, 2004.

                                       34
<PAGE>


         Other income (expense) decreased to income of $41,000 for the year
ended June 30, 2003 as compared to income of $3.2 million for the prior year,
primarily due to a $3.0 million payment received from Nektar in the prior year
in connection with the settlement of the patent infringement suit against
Nektar's subsidiary Shearwater Corporation, Inc. This one-time payment was
reimbursement for expenses we incurred in defending our branched PEG patent.

         Income Taxes. For the year ended June 30, 2004 the Company recognized a
net tax expense of approximately $3.2 million for federal and state purposes.
Income tax expense for the year ended June 30, 2004 is comprised of a tax
provision for income taxes payable and charge of $2.7 million primarily related
to an increase in the Company's valuation allowance for certain research and
development tax credits and capital losses that we believe it is now not more
likely than not that we may be able to utilize. We continue to believe it is
more likely than not that we will be able to utilize the majority of our net
operating loss carryforwards and tax credits. During the year ended June 30,
2004, we sold approximately $3.2 million of our state net operating loss
carryforwards for proceeds of $254,000 (which was recorded as a tax benefit) and
we purchased approximately $23.5 million of gross state net operating loss
carryforwards for $1.5 million.

         For the year ended June 30, 2003, we recognized net tax expense of
approximately $223,000. Certain tax expense, primarily related to the NPS
settlement in June 2003, was offset by the reduction in the valuation allowance
based on our net operating loss carryforwards expected to be utilized in the
future. We believe it is more likely than not that we will be able to utilize
the majority of our net operating loss carryforwards and tax credits, and we
therefore recognized $67.5 million of net deferred tax assets. Of these assets,
approximately $54.7 million related to net operating losses from stock option
exercises which, pursuant to SFAS No. 109, Accounting for Income Taxes, was
recorded as an increase in additional paid in capital and not as a credit to
income tax expense. The remaining benefit from the reduction of the valuation
allowance totaled $11.2 million and was recorded as an income tax benefit in the
Statement of Operations. During the year ended June 30, 2003, we sold
approximately $6.0 million of our state net operating loss carryforwards for
proceeds of $474,000 (which was recorded as a tax benefit) and we purchased
approximately $11.8 million of gross state net operating loss carryforwards for
$1.1 million.

CRITICAL ACCOUNTING POLICIES

         In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in Management's Discussion and Analysis of
Financial Condition and Results of Operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results of operations and requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.

         Our consolidated financial statements are presented in accordance with
accounting principles that are generally accepted in the United States. All
professional accounting standards effective as of June 30, 2004 have been taken
into consideration in preparing the consolidated financial statements. The
preparation of the consolidated financial statements requires estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. Some of those estimates are subjective and
complex, and, consequently, actual results could differ from those estimates.
The following accounting policies have been highlighted as significant because
changes to certain judgments and assumptions inherent in these policies could
affect our consolidated financial statements.

         Revenues from product sales and manufacturing revenue are recognized at
the time of shipment and a provision is made at that time for estimated future
credits, chargebacks, sales discounts, rebates and returns. These sales
provision accruals, except for rebates which are recorded as a liability, are
presented as a reduction of the accounts receivable balances. We continually
monitor the adequacy of the accruals by comparing the actual payments to the
estimates used in establishing the accruals. We ship product to customers
primarily FOB shipping point and utilize the following criteria to determine
appropriate revenue recognition: pervasive evidence of an arrangement exists,
delivery has occurred, selling price is fixed and determinable and collection is
reasonably assured.

         Royalties under our license agreements with third parties are
recognized when earned through the sale of the product by the licensor net of
any estimated future credits, chargebacks, sales discount rebates and refunds.

         Contract revenues are recorded as the earnings process is completed.
Non-refundable milestone payments that represent the completion of a separate
earnings process are recognized as revenue when earned, upon the occurrence of
contract-specified events and when the milestone has substance. Non-refundable
payments received upon entering into license and other collaborative agreements
where we have continuing involvement are recorded as deferred revenue and
recognized ratably over the estimated service period.

                                       35
<PAGE>

         Under the asset and liability method of Statement of Financial
Accounting Standards ("SFAS") No. 109, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. A
valuation allowance on net deferred tax assets is provided for when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. We have significant net deferred tax assets, primarily related to net
operating loss and other carryforwards, and continue to analyze what level of
the valuation allowance is needed taking into consideration the expected future
performance of the Company.

         We assess the carrying value of our cost method investments in
accordance with SFAS No. 115 and SEC Staff Accounting Bulletin (SAB) No. 59.
Commencing with the first quarter of fiscal 2005 the Company will evaluate
investments in accordance with EITF 03-01, the Meaning of Other-Than-Temporary
Impairment and its application to Certain Investments. An impairment write-down
is recorded when a decline in the value of an investment is determined to be
other-than-temporary. These determinations involve a significant degree of
judgment and are subject to change as facts and circumstances changes.

         In accordance with the provisions of SFAS No. 142, goodwill and
intangible assets determined to have an indefinite useful life acquired in a
purchase business combination, are not subject to amortization, are tested at
least annually for impairment, and are tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. The Company
completed its annual goodwill impairment test on May 31, 2004, which indicated
that goodwill was not impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset's fair value. This determination is
made at the Company level because the Company is in one reporting unit and
consists of two steps. First, the Company determines the fair value of its
reporting unit and compares it to its carrying amount. Second, if the carrying
amount of its reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the reporting unit's
goodwill over the implied fair value of that goodwill. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation, in accordance with FASB Statement
No. 141, Business Combinations. The residual fair value after this allocation is
the implied fair value of the Company's goodwill. Recoverability of amortizable
intangible assets is determined by comparing the carrying amount of the asset to
the future undiscounted net cash flow to be generated by the asset. The
evaluations involve amounts that are based on management's best estimate and
judgment. Actual results may differ from these estimates. If recorded values are
less than the fair values, no impairment is indicated. SFAS No. 142 also
requires that intangible assets with estimated useful lives be amortized over
their respective estimated useful lives.

         The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant of options to employees and members of the Board of Directors only
if the current market price of the underlying stock exceeded the exercise price.
SFAS No. 123, Accounting for Stock-Based Compensation, established accounting
for stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS
No. 123, as amended.

         When the exercise price of employee or director stock options is less
than the fair value of the underlying stock on the grant date, the Company
records deferred compensation for the difference and amortizes this amount to
expense over the vesting period of the options. Options or stock awards issued
to non-employees and consultants are recorded at their fair value as determined
in accordance with SFAS No. 123 and EITF No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and recognized over the related
vesting period.

RECENTLY ISSUED ACCOUNTING STANDARDS

         In December 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 (revised December 2003) ("FIN46-R"),
Consolidation of Variable Interest Entities, which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly should consolidate
the entity. FIN 46-R replaces FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which was issued in January 2003. FIN
46-R requires that if an entity has a controlling financial interest in a
variable interest entity, the assets, liabilities and results of activities of
the variable interest entity should be included in the consolidated financial
statements of the entity. The provisions of FIN 46-R are effective immediately
to those entities that are considered to be special-purpose entities. For all
other arrangements, the FIN 46-R provisions are required to be adopted at the
beginning of the first interim or annual period ending after March 15, 2004. As
of June 30, 2004 the Company is not a party to transactions contemplated under
FIN 46-R.

                                       36
<PAGE>

         In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus opinion on EITF 00-21, Revenue Arrangements with Multiple
Deliverables. The consensus provides that revenue arrangements with multiple
deliverables should be divided into separate units of accounting if certain
criteria are met. The consideration for the arrangement should be allocated to
the separate units of accounting based on their relative fair values, with
different provisions if the fair value of all deliverables is not known or if
the fair value is contingent on delivery of specified items or performance
conditions. Applicable revenue recognition criteria should be considered
separately for each separate unit of accounting. EITF 00-21 is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. This adoption did not have any impact on our financial position or results
of operations.

         In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 requires that certain financial
instruments, which under previous guidance were accounted for as equity, must
now be accounted for as liabilities. The financial instruments affected include
mandatorily redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock. SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003 and must be applied to the Company's existing financial
instruments effective July 1, 2003, the beginning of the first fiscal period
after June 15, 2003. The Company adopted SFAS No. 150 on July 1, 2003. The
adoption of this statement did not have a material effect on the Company's
condensed consolidated financial position, results of operations or cash flows.

         In November 2003, the Emerging Issues Task Force ("EITF") reached an
interim consensus on Issue No. 03-01, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments, to require additional
disclosure requirements for securities classified as available-for-sale or
held-to-maturity for fiscal years ending after December 15, 2003. Those
additional disclosures have been incorporated into the notes to consolidated
financial statements. In March 2004, the EITF reached a final consensus on this
Issue, to provide additional guidance, which companies must follow in
determining whether investment securities have an impairment which should be
considered other-than-temporary. The guidance is applicable for reporting
periods after June 15, 2004. The Company does not expect the adoption under the
final consensus to have a significant impact on our financial position results
of operations and cash flows.


                                       37
<PAGE>

RISK FACTORS

         OUR BUSINESS IS HEAVILY DEPENDENT ON THE CONTINUED SALE OF PEG-INTRON
AND ABELCET. IF REVENUES FROM EITHER OF THESE PRODUCTS FAIL TO INCREASE AS
ANTICIPATED OR MATERIALLY DECLINE, OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS WILL BE MATERIALLY HARMED.

              Our results of operations are heavily dependent on the revenues
derived from the sale and marketing of PEG-INTRON and ABELCET. Under our
agreement with Schering-Plough, pursuant to which Schering-Plough applies our
PEG technology to develop a modified form of Schering-Plough's INTRON A, we are
receiving royalties on worldwide sales of PEG-INTRON. During the fiscal year
ended June 30, 2004, total royalties comprised approximately 28% of our total
revenues. Hoffmann-La Roche recently received FDA and European Union approval
for PEGASYS, which competes with PEG-INTRON in the United States, Europe and
Canada. The launch of PEGASYS has led to greater competitive pressure on
PEG-INTRON sales. Since its launch, PEGASYS has taken market share away from
PEG-INTRON and the overall market for pegylated alpha-interferon in the
treatment of Hepatitis C has not increased sufficiently so as to offset the
effect the increasing PEGASYS sales have had on sales of PEG-INTRON. As a
result, quarterly sales of PEG-INTRON and the royalties we receive on those
sales have declined in recent quarters. We cannot assure you that PEGASYS will
not continue to gain market share at the expense of PEG-INTRON which could
result in lower PEG-INTRON sales and lower royalties to us. Schering-Plough is
responsible for conducting and funding the clinical studies, obtaining
regulatory approval, manufacturing and marketing the product worldwide on an
exclusive basis. Schering-Plough received marketing authorization for PEG-INTRON
and in PEG-INTRON and REBETOL capsules as combination therapy for the treatment
of hepatitis C in the U.S. and the European Union. If Schering-Plough fails to
effectively market PEG-INTRON or discontinues the marketing of PEG-INTRON for
these indications, this would have a material adverse effect on our business,
financial condition and results of operations.

         Even though the use of PEG-INTRON as a stand alone therapy and as
combination therapy with REBETOL has received FDA approval, we cannot assure you
that Schering-Plough will be successful in marketing PEG-INTRON or that
Schering-Plough will not continue to market INTRON A, either as a stand-alone
product or in combination therapy with REBETOL. The amount and timing of
resources dedicated by Schering-Plough to the marketing of PEG-INTRON is not
within our control. If Schering-Plough breaches or terminates its agreement with
us, the commercialization of PEG-INTRON could be slowed or blocked completely.
In addition, any ensuing dispute between us and Schering-Plough would be
expensive and time consuming, which could have a material, adverse effect on our
business, financial condition, and results of operations. Our revenues will be
negatively affected if Schering-Plough continues to market INTRON A in
competition with PEG-INTRON or if it cannot meet the manufacturing demands of
the market. In 2001, Schering-Plough was unable to manufacture sufficient
quantities of PEG-INTRON to meet market demand due to overwhelming demand for
the PEG-INTRON and ribavirin combination therapy. As a result, Schering-Plough
implemented a temporary wait list program for newly enrolled patients in order
to ensure uninterrupted access for those patients already using PEG-INTRON. As
of October 2, 2002, the wait list was terminated as a sufficient quantity of
PEG-INTRON and ribavirin was available to meet market demand.

         ABELCET accounts for $80.6 million or approximately 48% of our total
revenues and we expect that ABELCET will account for a significant portion of
our future total revenues. The entry of new products from Merck and Pfizer in
the antifungal market is currently impacting ABELCET sales, as clinicians
explore the use of these new therapeutic agents. In addition, Fujisawa
Healthcare, Inc. and Gilead Pharmaceuticals are currently marketing AMBISOME,
and InterMune, Inc. is marketing AMPHOTEC, each of which is a liposomal version
of Amphotericin, for the treatment of fungal infections. AMBISOME and AMPHOTEC
compete with ABELCET and sales of these competitive products have resulted in
greater competitive pressure on ABELCET sales. We cannot assure you that
revenues from the sale and marketing of ABELCET will remain at or above current
levels. In addition, our manufacturing facility in Indianapolis manufactures our
entire supply of ABELCET. If sales of ABELCET decline, if the Indianapolis
facility were to cease operations or if there were a long-term supply
interruption due to the facility's decreased production, our financial condition
and results of operations will be materially harmed.

         WE MAY NOT SUSTAIN PROFITABILITY.

         Prior to the fiscal year ended June 30, 2001, we had incurred
substantial losses. As of June 30, 2004, we had an accumulated deficit of
approximately $22.9 million. Although we earned a profit for the fiscal years
ended June 30, 2004, 2003 and 2002, we cannot assure you that we will be able to
remain profitable. Our ability to remain profitable will depend primarily on
Schering-Plough's effective marketing of PEG-INTRON and our effective marketing
of ABELCET, as well as on the rate of growth in our other product sales or
royalty revenue and on the level of our expenses. Our ability to achieve
long-term profitability will depend upon our and our licensees' ability to
obtain regulatory approvals for additional product candidates. Even if our
product candidates receive regulatory approval, we cannot assure you that our
products will achieve market acceptance or will be commercialized successfully
or that our operations will sustain profitability.

                                       38
<PAGE>

         WE ARE SUBJECT TO EXTENSIVE REGULATION. COMPLIANCE WITH THESE
REGULATIONS CAN BE COSTLY, TIME CONSUMING AND SUBJECT US TO UNANTICIPATED DELAYS
IN DEVELOPING OUR PRODUCTS. THE REGULATORY APPROVAL PROCESS IS HIGHLY UNCERTAIN
AND WE MAY NOT SUCCESSFULLY SECURE APPROVAL FOR MARQIBO.

         The manufacturing and marketing of pharmaceutical products in the
United States and abroad are subject to stringent governmental regulation. The
sale of any of our products for use in humans in the United States will require
the prior approval of the FDA. Similar approvals by comparable agencies are
required in most foreign countries. The FDA has established mandatory procedures
and safety standards that apply to the clinical testing, manufacture and
marketing of pharmaceutical products. Obtaining FDA approval for a new
therapeutic product may take several years and involve substantial expenditures.
ADAGEN was approved by the FDA in 1990. ONCASPAR was approved in the United
States and in Germany in 1994, and in Canada in 1997, in each case for patients
with acute lymphoblastic leukemia who are hypersensitive to native forms of
L-asparaginase. ONCASPAR was approved in Russia in April 1993 for therapeutic
use in a broad range of cancers. PEG-INTRON was approved in Europe and the
United States for the treatment of hepatitis C in May 2000 and January 2001,
respectively. ABELCET received U.S. approval in November 1995 and Canadian
approval in September 1997. DEPOCYT received U.S. approval in April 1999. Except
for these approvals, none of our other products has been approved for sale and
use in humans in the United States or elsewhere.

         We cannot assure you that we or our licensees will be able to obtain
FDA or other relevant marketing approval for any of our other products. In
addition, any approved products are subject to continuing regulation. If we or
our licensees fail to comply with applicable requirements it could result in:

         o  criminal penalties,

         o  civil penalties,

         o  fines,

         o  recall or seizure,

         o  injunctions requiring suspension of production,

         o  orders requiring ongoing supervision by the FDA, or

         o  refusal by the government to approve marketing or export
            applications or to allow us to enter into supply contracts.

         The NDA was submitted under the provisions of Subpart H (Accelerated
Approval of New Drugs for Serious or Life-Threatening Illnesses) of the Food,
Drug and Cosmetic Act. The Accelerated Approval regulations are intended to make
promising products for life-threatening diseases available to the market on the
basis of preliminary evidence prior to formal demonstration of patient benefit
and provide a path to approval using clinical data from a single-arm trial. The
risk of non-approval with a Subpart H NDA are higher than those associated with
a standard NDA review because of, among other things, the smaller number of
patients and more limited data. To the extent the FDA challenges or invalidates
any of the clinical trial data, the risks are greater with a Subpart H review
that the remaining data will not be sufficient to support regulatory approval.
Even if approval is obtained, approvals granted under Subpart H are provisional
and require a written commitment to complete post-approval clinical studies that
formally demonstrate patient benefit. Securing FDA approval based on a
single-arm trial, such as the trial underlying the MARQIBO NDA, is a particular
challenge and approval can never be assured. If approved, we plan to market
MARQIBO through our existing specialty sales force, which currently targets the
oncology market.

         In addition to relapsed aggressive NHL, along with Inex we are also
exploring the development of MARQIBO for a variety of other cancers, including
Hodgkin's disease, acute lymphoblastic leukemia, pediatric malignancies, and
first-line aggressive NHL in combination with other chemotherapeutic agents.

         If we or our licensees fail to obtain or maintain requisite
governmental approvals or fail to obtain or maintain approvals of the scope
requested, it will delay or preclude us or our licensees or marketing partners
from marketing our products. It could also limit the commercial use of our
products. Any such failure or limitation may have a material adverse effect on
our business, financial condition and results of operations.

         WE HAVE EXPERIENCED PROBLEMS COMPLYING WITH THE FDA'S REGULATIONS FOR
MANUFACTURING OUR PRODUCTS, AND HAVE HAD TO CONDUCT VOLUNTARY RECALLS OF CERTAIN
OF OUR PRODUCTS. THESE PROBLEMS COULD MATERIALLY HARM OUR BUSINESS.

                                       39
<PAGE>

         Manufacturers of drugs also must comply with the applicable FDA current
good manufacturing practice ("cGMP") regulations, which include quality control
and quality assurance requirements as well as the corresponding maintenance of
records and documentation. Manufacturing facilities are subject to ongoing
periodic inspection by the FDA and corresponding state agencies, including
unannounced inspections, and must be licensed as part of the product approval
process before they can be used in commercial manufacturing. We or our present
or future suppliers may be unable to comply with the applicable cGMP regulations
and other FDA regulatory requirements. We manufacture ABELCET, ONCASPAR and
ADAGEN. Schering-Plough is responsible for manufacturing PEG-INTRON and
SkyePharma is responsible for manufacturing DEPOCYT.

         ADAGEN and ONCASPAR use our earlier PEG technology which tends to be
less stable than the PEG technology used in PEG-INTRON and our products under
development. Due, in part, to the drawbacks in the earlier technologies we have
had and may continue to have manufacturing problems with these products.

         Manufacturing and stability problems required us to implement
voluntarily recalls for one ADAGEN batch in March 2001 and certain batches of
ONCASPAR in June 2002, July 2004 and September 2004. To date, we have been
unable to identify the cause of the manufacturing and stability problems related
to the batches of ONCASPAR that we voluntarily recalled in July and September
2004 and preliminary indicators do not rule out that an additional batch of
ONCASPAR may also be affected by manufacturing and stability problems, which we
may also voluntarily recall in the near term. In addition to voluntary recalls,
mandatory recalls can also take place if regulators or courts require them, even
if we believe our products are safe and effective. Recalls result in lost sales
of the recalled products themselves, and can result in further lost sales while
replacement products are manufactured or due to customer dissatisfaction. We
cannot assure you that future product recalls will not materially adversely
affect our business, our financial conditions, results of operations or our
reputation and relationships with our customers.

         During 1998, we experienced manufacturing problems with ONCASPAR. The
problems were due to increased levels of white particulates in batches of
ONCASPAR, which resulted in an increased rejection rate for this product. During
this period we agreed with the FDA to temporary labeling and distribution
restrictions for ONCASPAR and instituted additional inspection and labeling
procedures prior to distribution. In November 1999, as a result of manufacturing
changes we implemented, the FDA withdrew this distribution restriction.

         In July 1999, the FDA conducted an inspection of our manufacturing
facility in connection with our product license for ADAGEN. Following that
inspection, the FDA documented several deviations from cGMP in a Form 483
report. We provided the FDA with a corrective action plan. In November 1999, the
FDA issued a warning letter citing the same cGMP deviations listed in the July
1999 Form 483, but it also stated that the FDA was satisfied with our proposed
corrective actions. As a result of the deviations, the FDA decided not to
approve product export requests from us for ONCASPAR until it determined that
all noted cGMP deviations were either corrected or in the process of being
corrected. This restriction was removed in August 2000.

         Since January 2000, the FDA has conducted follow-up inspections as well
as routine inspections of our manufacturing facilities related to ABELCET,
ONCASPAR and ADAGEN. Following certain of these inspections, the FDA has issued
Form 483 reports citing deviations from cGMP, the most recent ones of which were
issued in April 2004 for our New Jersey and Indianapolis manufacturing
facilities. We have or are in the process of responding to such reports with
corrective action plans.

         We are aware that the FDA has conducted inspections of certain of the
manufacturing facilities of Schering-Plough, and those inspections have resulted
in the issuance of Form 483s citing deviations from cGMP.

         If we or our licensees, including Schering-Plough, face additional
manufacturing problems in the future or if we or our licensees are unable to
satisfactorily resolve current or future manufacturing problems, the FDA could
require us or our licensees to discontinue the distribution of our products or
to delay continuation of clinical trials. In addition, if we or our licensees,
including Schering-Plough, cannot market and distribute our products for an
extended period, sales of the products and customer relationships will suffer,
which would adversely affect our financial results.

         OUR CLINICAL TRIALS COULD TAKE LONGER TO COMPLETE AND COST MORE THAN WE
EXPECT.

         We will need to conduct significant additional clinical studies of all
of our product candidates, which have not yet been approved for sale. These
studies are costly, time consuming and unpredictable. Any unanticipated costs or
delays in our clinical studies could harm our business, financial condition and
results of operations.

         A Phase III clinical trial is being conducted for PEG-INTRON for one
cancer indication. Schering-Plough is also in early stage clinical trials for
PEG-INTRON in other cancer indications. Schering-Plough is currently conducting
late-stage strategic clinical trials for treatment of hepatitis C in Japan.
Clinical trials are also being conducted for PEG-INTRON as a long term
maintenance therapy (the COPILOT study) and separately as combination therapy
with REBETOL in patients with chronic hepatitis C who did not respond to or had
relapsed following previous interferon-based therapy. We are currently
conducting a pivotal clinical trial for Pegamotecan and plan to initiate a
pivotal clinical trial for ATG-FRESENIUS S during the remaining of calendar
2004. The rate of completion of clinical trials depends upon many factors,
including the rate of enrollment of patients. The enrollment of patients and the
intensifying competitiveness of patient recruitment activities is increasingly a
delaying factor in the completion of clinical trials. If we or the other
sponsors of these clinical trials are unable to recruit sufficient clinical
patients in such trials during the appropriate period, such trials may be
delayed and will likely incur significant additional costs. In addition, FDA or
institutional review boards may require us to delay, restrict, or discontinue
our clinical trials on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.

                                       40
<PAGE>

         The cost of human clinical trials varies dramatically based on a number
of factors, including:

         o  the order and timing of clinical indications pursued,

         o  the extent of development and financial support from corporate
            collaborators,

         o  the number of patients required for enrollment,

         o  the difficulty of obtaining clinical supplies of the product
            candidate, and

         o  the difficulty in obtaining sufficient patient populations and
            clinicians.

         All statutes and regulations governing the conduct of clinical trials
are subject to change in the future, which could affect the cost of our clinical
trials. Any unanticipated costs or delays in our clinical studies could harm our
business, financial condition and results of operations.

         In some cases, we rely on corporate collaborators or academic
institutions to conduct some or all aspects of clinical trials involving our
product candidates. We will have less control over the timing and other aspects
of these clinical trials than if we conducted them entirely on our own. We
cannot assure you that these trials will commence or be completed as we expect
or that they will be conducted successfully.

         IF PRECLINICAL AND CLINICAL TRIALS DO NOT YIELD POSITIVE RESULTS, OUR
PRODUCT CANDIDATES WILL FAIL.

         If preclinical and clinical testing of one or more of our product
candidates does not demonstrate the safety and efficacy of product candidates
for the desired indications, those potential products will fail. Numerous
unforeseen events may arise during, or as a result of, the testing process,
including the following:

         o  the results of preclinical studies may be inconclusive, or they may
            not be indicative of results that will be obtained in human clinical
            trials,

         o  potential products may not have the desired effect or may have
            undesirable side effects or other characteristics that preclude
            regulatory approval or limit their commercial use if approved,

         o  results attained in early human clinical trials may not be
            indicative of results that are obtained in later clinical trials,
            and

         o  after reviewing test results, we or our strategic partners may
            abandon projects which we might previously have believed to be
            promising.

         Clinical testing is very costly and can take many years. The failure to
adequately demonstrate the safety and efficacy of a therapeutic product under
development would delay or prevent regulatory approval, which could adversely
affect our business and financial performance.

         In June 2001, we reported that Schering-Plough completed its Phase III
clinical trial, which compared PEG-INTRON to INTRON A in patients with newly
diagnosed chronic myelogenous leukemia or CML. In the study, although PEG-INTRON
demonstrated clinical comparability and a comparable safety profile with INTRON
A, the efficacy results for PEG-INTRON did not meet the protocol-specified
statistical criteria for non-inferiority, the primary endpoint of the study.


                                       41
<PAGE>

         EVEN IF WE OBTAIN REGULATORY APPROVAL FOR OUR PRODUCTS, THEY MAY NOT BE
ACCEPTED IN THE MARKETPLACE.

         The commercial success of our products will depend upon their
acceptance by the medical community and third-party payors as clinically useful,
cost-effective and safe. Even if our products obtain regulatory approval, we
cannot assure you that they will achieve market acceptance of any kind. The
degree of market acceptance will depend on many factors, including:

         o  the receipt, timing and scope of regulatory approvals,

         o  the timing of market entry in comparison with potentially
            competitive products,

         o  the availability of third-party reimbursement, and

         o  the establishment and demonstration in the medical community of the
            clinical safety, efficacy and cost-effectiveness of drug candidates,
            as well as their advantages over existing technologies and
            therapeutics.

         If any of our products do not achieve market acceptance, we will likely
lose our entire investment in that product, giving rise to a material, adverse
effect on our business, financial condition and results of operations.

         WE DEPEND ON OUR COLLABORATIVE PARTNERS. IF WE LOSE OUR COLLABORATIVE
PARTNERS OR THEY DO NOT APPLY ADEQUATE RESOURCES TO OUR COLLABORATIONS, OUR
PRODUCT DEVELOPMENT AND FINANCIAL PERFORMANCE MAY SUFFER.

         We rely heavily and will depend heavily in the future on collaborations
with corporate partners, primarily pharmaceutical and biotechnology companies,
for one or more of the research, development, manufacturing, marketing and other
commercialization activities relating to many of our product candidates. If we
lose our collaborative partners, or if they do not apply adequate resources to
our collaborations, our product development and financial performance may
suffer.

         The amount and timing of resources dedicated by our collaborators to
their collaborations with us is not within our control. If any collaborator
breaches or terminates its agreements with us, or fails to conduct its
collaborative activities in a timely manner, the commercialization of our
product candidates could be slowed or blocked completely. We cannot assure you
that our collaborative partners will not change their strategic focus or pursue
alternative technologies or develop alternative products as a means for
developing treatments for the diseases targeted by these collaborative programs.
Our collaborators could develop competing products. In addition, our revenues
will be affected by the effectiveness of our corporate partners in marketing any
successfully developed products. For example, our royalty revenues relating to
PEG-INTRON have declined significantly due to PEG-INTRON'S loss of market share
to Roche's PEGASYS.

         We cannot assure you that our collaborations will be successful.
Disputes may arise between us and our collaborators as to a variety of matters,
including financing obligations under our agreements and ownership of
intellectual property rights. These disputes may be both expensive and
time-consuming and may result in delays in the development and commercialization
of products.

         WE PURCHASE SOME OF THE COMPOUNDS UTILIZED IN OUR PRODUCTS FROM A
SINGLE SOURCE OR A LIMITED GROUP OF SUPPLIERS, AND THE PARTIAL OR COMPLETE LOSS
OF ONE OF THESE SUPPLIERS COULD CAUSE PRODUCTION DELAYS AND A SUBSTANTIAL LOSS
OF REVENUES.

         The supplier of the active pharmaceutical ingredient for ADAGEN has
recently elected to terminate its supply agreement with us and we may not be
able to secure an alternative source of supply before this supplier discontinues
supplying us.

         We purchase the unmodified compounds and bulk PEGs utilized in our
approved products and products under development from outside suppliers. We may
be required to enter into supply contracts with outside suppliers for certain
unmodified compounds. For example, we have an agreement with Hoffmann-La Roche
Diagnostics GmbH to produce the unmodified adenosine deaminase enzyme used in
the manufacture of ADAGEN and agreements with Merck & Co., Inc. and Kyowa Hakko
to produce the unmodified forms of L-asparaginase used in the manufacture of
ONCASPAR. We have two suppliers that produce the amphotericin used in the
manufacture of ABELCET, Bristol-Myers Squibb and Alpharma A.p.S. We have a
supply agreement with Bristol-Myers Squibb, but not with Alpharma. If we
experience a delay in obtaining or are unable to obtain any unmodified compound,
including unmodified adenosine deaminase, unmodified L-asparaginase or
amphotericin, on reasonable terms, or at all, it could have a material adverse
effect on our business, financial condition and results of operations. We
purchase the lipids used in the manufacture of ABELCET and the PEGs used in the
manufacture of ONCASPAR and ADAGEN from a limited number of suppliers. We do not
have formal supply agreements with any of these suppliers. No assurance can be
given that alternative suppliers with appropriate regulatory authorizations
could be readily identified if necessary. If we experience delays in obtaining
or are unable to obtain any such raw materials on reasonable terms, or at all,
it could have a material, adverse effect on our business, financial condition
and results of operations.

                                       42
<PAGE>

If we are required to obtain an alternate source for an unmodified compound
utilized in a product, the FDA and relevant foreign regulatory agencies will
likely require that we perform additional testing to demonstrate that the
alternate material is biologically and chemically equivalent to the unmodified
compound previously used in our clinical trials. This testing could delay or
stop development of a product, limit commercial sales of an approved product and
cause us to incur significant additional expenses. If we are unable to
demonstrate that the alternate material is chemically and biologically
equivalent to the previously used unmodified compound, we will likely be
required to repeat some or all of the preclinical and clinical trials conducted
for the compound. The marketing of an FDA approved drug could be disrupted while
such tests are conducted. Even if the alternate material is shown to be
chemically and biologically equivalent to the previously used compound, the FDA
or relevant foreign regulatory agency may require that we conduct additional
clinical trials with the alternate material.

         Hoffmann-La Roche Diagnostics GmbH ("Roche Diagnostics"), which is
based in Germany, is the only FDA-approved supplier of the adenosine deaminase
enzyme, or ADA, used in ADAGEN. During 2002 we obtained FDA approval of the use
of the ADA enzyme obtained from bovine intestines from cattle of New Zealand
origin. New Zealand currently certifies that it's cattle are bovine spongiform
encephalopathy (BSE or mad cow disease) free. Beginning in September 2002, the
United States Department of Agriculture ("USDA") required all animal-sourced
materials shipped to the United States from any European country to contain a
veterinary certificate that the product is BSE free, regardless of the country
of origin. In September, 2003, Roche Diagnostics notified us that it has elected
to terminate our ADA supply agreement as of June 12, 2004. We are currently
seeking to develop recombinant ADA as an alternative to the bovine derived
product. This is a difficult and expensive undertaking as to which success
cannot be assured. Roche Diagnostics has indicated that it will continue to
supply us with our requirements of ADA for a reasonable period of time after
termination of our supply agreement as we work to develop another source of ADA.
If we are unable to secure an alternative source of ADA before Roche Diagnostics
discontinues supplying the material to us, we will likely experience inventory
shortages and potentially a period of product unavailability and/or a long term
inability to produce ADAGEN. If this occurs, it will have a measurable (and
potentially material) negative impact on our business and results of operations
and it could potentially result in significant reputational harm and regulatory
difficulties.

         THE UNITED STATES AND FOREIGN PATENTS UPON WHICH OUR ORIGINAL PEG
TECHNOLOGY WAS BASED HAVE EXPIRED. WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS,
WHICH MAY OFFER ONLY LIMITED PROTECTION AGAINST POTENTIAL INFRINGEMENT AND THE
DEVELOPMENT BY OUR COMPETITORS OF COMPETITIVE PRODUCTS.

         Research Corporation Technologies, Inc. held the patent upon which our
original PEG technology was based and had granted us a license under such
patent. Research Corporation's patent contained broad claims covering the
attachment of PEG to polypeptides. However, this United States patent and its
corresponding foreign patents expired in December 1996. Based upon the
expiration of the Research Corporation patent, other parties will be permitted
to make, use or sell products covered by the claims of the Research Corporation
patent, subject to other patents, including those which we hold. We have
obtained numerous patents with claims covering improved methods of attaching or
linking PEG to therapeutic compounds. We cannot assure you that any of these
patents will enable us to prevent infringement or that competitors will not
develop alternative methods of attaching PEG to compounds potentially resulting
in competitive products outside the protection that may be afforded by our
patents. We are aware that others have also filed patent applications and have
been granted patents in the United States and other countries with respect to
the application of PEG to proteins and other compounds. However, other than
Hoffmann-La Roche's PEGASYS, we are unaware of any other PEGylated products that
compete with our PEGylated products. The expiration of the Research Corporation
patent or other patents related to PEG that have been granted to third parties
may have a material adverse effect on our business, financial condition and
results of operations.

         The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
Our success depends, in part, on our ability to develop and maintain a strong
patent position for our products and technologies both in the United States and
in other countries. We have been issued 114 patents in the United States, many
of which have foreign counterparts. These patents, if extensions are not
granted, are expected to expire beginning in 2004 through 2022. We have also
filed and currently have pending 43 patent applications in the United States.
Under our license agreements, we have access to large portions of Micromet's and
Nektar's patent estates as well as a small number of individually licensed
patents. Of the patents owned or licensed by us, 7 relate to PEG-INTRON, 17
relate to ABELCET, 11 relate to Pegamotecan, 3 relate to DEPOCYT and 18 relate
to MARQIBO. Although we believe that our patents provide certain protection from
competition, we cannot assure you that such patents will be of substantial
protection or commercial benefit to us, will afford us adequate protection from
competing products, or will not be challenged or declared invalid. In addition,
we cannot assure you that additional United States patents or foreign patent
equivalents will be issued to us. The scope of patent claims for
biotechnological inventions is uncertain, and our patents and patent
applications are subject to this uncertainty.

                                       43
<PAGE>

         To facilitate development of our proprietary technology base, we may
need to obtain licenses to patents or other proprietary rights from other
parties. If we are unable to obtain such licenses, our product development
efforts may be delayed or blocked.

         We are aware that certain organizations are engaging in activities that
infringe certain of our PEG and SCA technology patents. We cannot assure you
that we will be able to enforce our patent and other rights against such
organizations.

         We expect that there will continue to be significant litigation in the
biotechnology and pharmaceutical industries regarding patents and other
proprietary rights. We have in the past been involved in patent litigation, and
we may likely become involved in additional patent litigation in the future. We
may incur substantial costs in asserting any patent rights and in defending
suits against us related to intellectual property rights. Such disputes could
substantially delay our product development or commercialization activities and
could have a material adverse effect on our business, financial condition and
results of operations.

         We also rely on trade secrets, know-how and continuing technological
advancements to protect our proprietary technology. We have entered into
confidentiality agreements with our employees, consultants, advisors and
collaborators. However, these parties may not honor these agreements, and we may
not be able to successfully protect our rights to unpatented trade secrets and
know-how. Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets and
know-how.

         OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
WHICH COULD INCREASE OUR COSTS AND NEGATIVELY AFFECT OUR PROFITABILITY.

         Our success also depends on avoiding infringement of the proprietary
technologies of others. In particular, there may be certain issued patents and
patent applications claiming subject matter which we or our collaborators may be
required to license in order to research, develop or commercialize at least some
of our products. In addition, third parties may assert infringement or other
intellectual property claims against us. An adverse outcome in these proceedings
could subject us to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require us to cease or modify the
use of our technology. If we are required to license such technology, we cannot
assure you that a license under such patents and patent applications will be
available on acceptable terms or at all. Further, we may incur substantial costs
defending ourselves in lawsuits against charges of patent infringement or other
unlawful use of another's proprietary technology.

         WE HAVE LIMITED SALES AND MARKETING EXPERIENCE, WHICH MAKES US
DEPENDENT ON OUR MARKETING PARTNERS.

         We have historically had limited experience in sales, marketing or
distribution. In connection with our acquisition of the North American ABELCET
business from Elan in November 2002, we acquired a 60-person sales and marketing
team. In addition, we have recently acquired marketing rights to DEPOCYT from
SkyePharma and reacquired the rights to market and distribute ONCASPAR in the
United States and certain other countries in June 2002. Prior to these
acquisitions, ADAGEN, which we market on a worldwide basis to a small patient
population, was the only product for which we engaged in the direct commercial
marketing, and therefore, we are significantly dependent on the ABELCET sales
and marketing team to promote ABELCET. We have provided exclusive marketing
rights to Schering-Plough for PEG-INTRON worldwide and to Medac GmbH for
ONCASPAR in most of Europe and parts of Asia. We have an agreement with Nova
Factor, Inc. (formerly known as Gentiva Health Services, Inc.) to purchase and
distribute ADAGEN, ONCASPAR and DEPOCYT in the United States and Canada. To the
extent that we enter into licensing arrangements for the marketing and sale of
our future products, we may not be able to enter into or maintain such
arrangements on acceptable terms, if at all, and any revenues we receive will
depend primarily on the efforts of these third parties. We will not control the
amount and timing of marketing resources that such third parties devote to our
products. In addition, to the extent that we market products directly,
significant additional expenditures and management resources would be required
to increase the size of our internal sales force. In any sales or marketing
effort, we would compete with many other companies that currently have extensive
and well-funded sales operations. Our marketing and sales efforts may be unable
to compete successfully against such other companies.

                                       44
<PAGE>

         WE MAY ACQUIRE OTHER COMPANIES OR PRODUCTS AND MAY BE UNABLE TO
SUCCESSFULLY INTEGRATE SUCH COMPANIES WITH OUR OPERATIONS.

         We may expand and diversify our operations with acquisitions. Indeed,
the execution of strategic transactions is an important part of our strategy. If
we are unsuccessful in integrating any such company with our operations, or if
integration is more difficult than anticipated, we may experience disruptions
that could have a material adverse effect on our business, financial condition
and results of operations. Some of the risks that may affect our ability to
integrate or realize any anticipated benefits from any acquisition include those
associated with:

         o  unexpected losses of key employees or customers of the acquired
            company;

         o  conforming the acquired company's standards, processes, procedures
            and controls with our operations;

         o  coordinating our new product and process development;

         o  diversion of existing management relating to the integration and
            operation of the acquired company; hiring additional management and
            other critical personnel; and

         o  increasing the scope, geographic diversity and complexity of our
            operations.

         WE MAY NEED TO OBTAIN ADDITIONAL FINANCING TO MEET OUR FUTURE CAPITAL
NEEDS, AND THIS FINANCING MAY NOT BE AVAILABLE WHEN WE NEED IT.

         Our current development projects require substantial capital. We may
require substantial additional funds to conduct research activities, preclinical
studies, clinical trials and other activities relating to the successful
commercialization of potential products. In addition, we may seek to acquire
additional products, technologies and companies, which could require substantial
capital. In addition, we cannot be sure that we will be able to continue to
obtain significant revenue from PEG-INTRON. Additional funds from other sources
may not be available on acceptable terms, if at all. If adequate funds are
unavailable from operations or additional sources of financing, we may have to
delay, reduce the scope of or eliminate one or more of our research or
development programs or one or more of our proposed acquisitions of technologies
or companies which could materially and adversely affect our business, financial
condition and operations.

         While we believe that our cash, cash equivalents and investments will
be adequate to satisfy our capital needs for the foreseeable future, our actual
capital requirements will depend on many factors, including:

         o  the level of revenues we receive from our FDA-approved products and
            product candidates,

         o  continued progress of our research and development programs,

         o  our ability to establish additional collaborative arrangements,

         o  changes in our existing collaborative relationships,

         o  progress with preclinical studies and clinical trials,

         o  the time and costs involved in obtaining regulatory clearance for
            our products,

         o  the costs involved in preparing, filing, prosecuting, maintaining
            and enforcing patent claims,

         o  competing technological and market developments, and

         o  our ability to market and distribute our products and establish new
            collaborative and licensing arrangements.

         We may seek to raise any necessary additional funds through equity or
debt financings, collaborative arrangements with corporate partners or other
sources which may be dilutive to existing stockholders. We cannot assure you
that we will be able to obtain additional funds on acceptable terms, if at all.
If adequate funds are not available, we may be required to:

         o  delay, reduce the scope or eliminate one or more of our development
            projects,

         o  obtain funds through arrangements with collaborative partners or
            others that may require us to relinquish rights to technologies,
            product candidates or products that we would otherwise seek to
            develop or commercialize ourselves, or

         o  license rights to technologies, product candidates or products on
            terms that are less favorable to us than might otherwise be
            available.

                                       45
<PAGE>

         WE DEPEND ON KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN THESE
EMPLOYEES OR RECRUIT ADDITIONAL QUALIFIED PERSONNEL, WHICH WOULD HARM OUR
BUSINESS.

         Because of the specialized scientific nature of our business, we are
highly dependent upon qualified scientific, technical and managerial personnel,
which include Kenneth J. Zuerblis and Ulrich Grau, Ph.D. There is intense
competition for qualified personnel in the pharmaceutical field. Therefore, we
may not be able to attract and retain the qualified personnel necessary for the
development of our business. Although we have employment agreements with Mr.
Zuerblis and Dr. Grau, our ability to continue to retain them is not assured and
the loss of their services as well as the failure to recruit additional key
scientific, technical and managerial personnel in a timely manner, would harm
our research and development programs and our business.

         We currently do not have a Chief Executive Officer. Since the departure
of our prior CEO, Arthur J. Higgins, who is now Chairman and Chief Executive
Officer of Bayer Health Care, we have been engaged in a search for a new CEO. We
have evaluated numerous candidates and are currently negotiating with a lead
candidate. We anticipate that this person will join us as CEO in the near
future. No assurance can be given as to whether or not this person will join us
as CEO. We are continuing the search process with respect to other candidates in
the event that the lead candidate does not become our new CEO. If our lead
candidate is unable or unwilling to join us as CEO in the near future, the
search process is likely to extend into calendar 2005. An extended period of
time without a CEO could materially, adversely effect our business, financial
conditions or results of operations.

RISKS RELATED TO OUR INDUSTRY

         WE FACE RAPID TECHNOLOGICAL CHANGE AND INTENSE COMPETITION, WHICH COULD
HARM OUR BUSINESS AND RESULTS OF OPERATIONS.

         The biopharmaceutical industry is characterized by rapid technological
change. Our future success will depend on our ability to maintain a competitive
position with respect to technological advances. Rapid technological development
by others may result in our products and technologies becoming obsolete.

         Many of our competitors have substantially greater research and
development capabilities and experience and greater manufacturing, marketing and
financial resources than we do. Accordingly, our competitors may develop
technologies and products that are superior to those we or our collaborators are
developing and render our technologies and products or those of our
collaborators obsolete and noncompetitive. In addition, many of our competitors
have much more experience than we do in preclinical testing and human clinical
trials of new drugs, as well as obtaining FDA and other regulatory approval. If
we cannot compete effectively, our business and financial performance would
suffer.

         We face intense competition from established biotechnology and
pharmaceutical companies, as well as academic and research institutions that are
pursuing competing technologies and products. We know that competitors are
developing or manufacturing various products that are used for the prevention,
diagnosis or treatment of diseases that we have targeted for product
development. For example, Hoffmann-La-Roche's PEGASYS has received FDA and
European Union approval for treatment of Hepatitis C as a monotherapy and in
combination with Ribavirin. PEGASYS competes with PEG-INTRON in the United
States and the European Union and has led to intensive competitive pressure on
PEG-INTRON sales. Since its launch, PEGASYS has taken market share away from
PEG-INTRON and the overall market for pegylated alpha-interferon in the
treatment of Hepatitis C has not increased sufficiently so as offset the effect
the increasing PEGASYS sales have had on sales of PEG-INTRON. As a result,
quarterly sales of PEG-INTRON and the royalties we receive on those sales have
declined in recent quarters. We cannot assure you that PEGASYS will not continue
to gain market share at the expense of PEG-INTRON which could result in lower
PEG-INTRON sales and lower royalties to us. Similarly, Fujisawa Healthcare, Inc.
and Gilead Pharmaceuticals are currently marketing AmBisome, and InterMune, Inc.
is marketing Amphotec, each of which is a liposomal version of amphotericin, for
the treatment of fungal infections. AmBisome and Amphotec compete with ABELCET
and sales of these competitive products have resulted in intensive competitive
pressure on ABELCET sales. DEPOCYT, an injectable, sustained release formulation
of the chemotherapeutic agent cytarabine for the treatment of lymphomatous
meningitis, competes with the generic drugs, Cytarabine and Methotrexate, and
ONCASPAR, a PEG-enhanced version of a naturally occurring enzyme called
L-asparaginase, competes with Asparaginase to treat patients with acute
lymphoblastic leukemia.


                                       46
<PAGE>

         Existing and future products, therapies and technological approaches
will compete directly with our products. Current and prospective competing
products may provide greater therapeutic benefits for a specific problem or may
offer comparable performance at a lower cost. Any product candidate that we
develop and that obtains regulatory approval must then compete for market
acceptance and market share. Our product candidates may not gain market
acceptance among physicians, patients, healthcare payors and the medical
community.

         WE MAY BE SUED FOR PRODUCT LIABILITY.

         Because our products and product candidates are new treatments with
limited, if any, past use on humans, their use during testing or after approval
could expose us to product liability claims. We maintain product liability
insurance coverage in the total amount of $40 million for claims arising from
the use of our products in clinical trials prior to FDA approval and for claims
arising from the use of our products after FDA approval. We cannot assure you
that we will be able to maintain our existing insurance coverage or obtain
coverage for the use of our other products in the future. Also, this insurance
coverage and our resources may not be sufficient to satisfy any liability
resulting from product liability claims, and a product liability claim may have
a material adverse effect on our business, financial condition or results of
operations.

         BECAUSE OF THE UNCERTAINTY OF PHARMACEUTICAL PRICING, REIMBURSEMENT AND
HEALTHCARE REFORM MEASURES, WE MAY BE UNABLE TO SELL OUR PRODUCTS PROFITABLY IN
THE UNITED STATES.

         The availability of reimbursement by governmental and other third-party
payors affects the market for any pharmaceutical product. In recent years, there
have been numerous proposals to change the healthcare system in the United
States and further proposals are likely. Some of these proposals have included
measures that would limit or eliminate payments for medical procedures and
treatments or subject the pricing of pharmaceuticals to government control. In
addition, government and private third-party payors are increasingly attempting
to contain healthcare costs by limiting both the coverage and the level of
reimbursement of drug products. Consequently, significant uncertainty exists as
to the reimbursement status of newly-approved health care products.

         Our ability to commercialize our products will depend, in part, on the
extent to which reimbursement for the cost of the products and related
treatments will be available from third-party payors. If we or any of our
collaborators succeeds in bringing one or more products to market, we cannot
assure you that third-party payors will establish and maintain price levels
sufficient for realization of an appropriate return on our investment in product
development. In addition, lifetime limits on benefits included in most private
health plans may force patients to self-pay for treatment. For example, patients
who receive ADAGEN are expected to require injections for their entire lives.
The cost of this treatment may exceed certain plan limits and cause patients to
self-fund further treatment. Furthermore, inadequate third-party coverage may
lead to reduced market acceptance of our products. Significant changes in the
healthcare system in the United States or elsewhere could have a material
adverse effect on our business and financial performance.

RISKS RELATED TO OUR SUBORDINATED NOTES AND COMMON STOCK

         THE PRICE OF OUR COMMON STOCK HAS BEEN, AND MAY CONTINUE TO BE,
VOLATILE WHICH MAY SIGNIFICANTLY AFFECT THE TRADING PRICE OF OUR NOTES.

         Historically, the market price of our common stock has fluctuated over
a wide range, and it is likely that the price of our common stock will fluctuate
in the future. The market price of our common stock could be impacted due to a
variety of factors, including:

         o  the results of preclinical testing and clinical trials by us, our
            corporate partners or our competitors,

         o  announcements of technical innovations or new products by us, our
            corporate partners or our competitors,

         o  the status of corporate collaborations and supply arrangements,

         o  regulatory approvals,

         o  government regulation,

         o  developments in patent or other proprietary rights,

         o  public concern as to the safety and efficacy of products developed
            by us or others,

         o  litigation,

         o  acts of war or terrorism in the United States or worldwide, and

                                       47
<PAGE>

         o  general market conditions in our industry.

         In addition, due to one or more of the foregoing factors in one or more
future quarters, our results of operations may fall below the expectations of
securities analysts and investors. In that event, the market price of our common
stock could be materially and adversely affected.

         The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have especially affected the market price of
the stock of many high technology and healthcare-related companies. Such
fluctuations have often been unrelated to the operating performance of these
companies. Nonetheless, these broad market fluctuations may negatively affect
the market price of our common stock.

         OUR NOTES ARE SUBORDINATED TO ALL EXISTING AND FUTURE INDEBTEDNESS.

         Our 4.5% convertible subordinated notes are unsecured and subordinated
in right of payment to all of our existing and future senior indebtedness. In
the event of our bankruptcy, liquidation or reorganization, or upon acceleration
of the notes due to an event of default under the indenture and in certain other
events, our assets will be available to pay obligations on the notes only after
all senior indebtedness has been paid. As a result, there may not be sufficient
assets remaining to pay amounts due on any or all of the outstanding notes. We
are not prohibited from incurring debt, including senior indebtedness, under the
indenture. If we were to incur additional debt or liabilities, our ability to
pay our obligations on the notes could be adversely affected. As of June 30,
2004, we had no senior indebtedness outstanding.

         WE MAY BE UNABLE TO REDEEM OUR NOTES UPON A FUNDAMENTAL CHANGE.

         We may be unable to redeem our notes in the event of a fundamental
change. Upon a fundamental change, holders of the notes may require us to redeem
all or a portion of the notes. If a fundamental change were to occur, we may not
have enough funds to pay the redemption price for all tendered notes. Any future
credit agreements or other agreements relating to our indebtedness may contain
similar provisions, or expressly prohibit the repurchase of the notes upon a
fundamental change or may provide that a fundamental change constitutes an event
of default under that agreement. If a fundamental change occurs at a time when
we are prohibited from purchasing or redeeming notes, we could seek the consent
of our lenders to redeem the notes or could attempt to refinance this debt. If
we do not obtain a consent, we could not purchase or redeem the notes. Our
failure to redeem tendered notes would constitute an event of default under the
indenture. In such circumstances, or if a fundamental change would constitute an
event of default under our senior indebtedness, the subordination provisions of
the indenture would restrict payments to the holders of notes. A "fundamental
change" is any transaction or event (whether by means of an exchange offer,
liquidation, tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) in connection with which all or substantially all
of our common stock is exchanged for, converted into, acquired for or
constitutes solely the right to receive, consideration which is not all or
substantially all common stock that:

         o  is listed on, or immediately after the transaction or event will be
            listed on, a United States national securities exchange, or

         o  is approved, or immediately after the transaction or event will be
            approved, for quotation on The NASDAQ National Market or any similar
            United States system of automated dissemination of quotations of
            securities prices.

         The term fundamental change is limited to certain specified
transactions and may not include other events that might adversely affect our
financial condition or the market value of the notes or our common stock. Our
obligation to offer to redeem the notes upon a fundamental change would not
necessarily afford holders of the notes protection in the event of a highly
leveraged transaction, reorganization, merger or similar transaction involving
us.

         A PUBLIC MARKET FOR OUR NOTES MAY FAIL TO DEVELOP OR BE SUSTAINED.

         The initial purchasers of the notes, although they have advised us that
they intend to make a market in the notes, are not obligated to do so and may
discontinue this market making activity at any time without notice. In addition,
market making activity by the initial purchasers will be subject to the limits
imposed by the Securities Act and the Exchange Act of 1934, as amended. As a
result, we cannot assure you that any market for the notes will develop or, if
one does develop, that it will be maintained. If an active market for the notes
fails to develop or be sustained, the trading price of the notes could be
materially adversely affected.


                                       48
<PAGE>

         EVENTS WITH RESPECT TO OUR SHARE CAPITAL COULD CAUSE THE PRICE OF OUR
COMMON STOCK TO DECLINE.

         Sales of substantial amounts of our common stock in the open market, or
the availability of such shares for sale, could adversely affect the price of
our common stock. An adverse effect on the price of our common stock may
adversely affect the trading price of the notes. We had 43.8 million shares of
common stock outstanding as of June 30, 2004. The following securities that may
be exercised for, or are convertible into, shares of our common stock were
issued and outstanding as of June 30, 2004:

         o  Options. Stock options to purchase 4.8 million shares of our common
            stock at a weighted average exercise price of approximately $25.90
            per share; of this total, 2.0 million were exercisable at a weighted
            average exercise price of $35.37 per share as of such date.

         o  Convertible subordinated notes. Notes which will convert to 5.6
            million shares of our common stock at a conversion price of $70.98
            as of such date.

         The shares of our common stock that may be issued under the options and
upon conversion of the Convertible Subordinated Notes are currently registered
with the SEC. The shares of common stock that may be issued upon conversion of
the Convertible Subordinated Notes are eligible for sale without any volume
limitations pursuant to Rule 144(k) under the Securities Act.

         THE ISSUANCE OF PREFERRED STOCK MAY ADVERSELY AFFECT RIGHTS OF COMMON
STOCKHOLDERS OR DISCOURAGE A TAKEOVER.

         Under our certificate of incorporation, our board of directors has the
authority to issue up to 3.0 million shares of preferred stock and to determine
the price, rights, preferences and privileges of those shares without any
further vote or action by our stockholders. The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any shares of preferred stock that may be issued in the future.

         In May 2002, our board of directors authorized shares of Series B
Preferred Stock in connection with its adoption of a stockholder rights plan,
under which we issued rights to purchase Series B Preferred Stock to holders of
the common stock. Upon certain triggering events, such rights become exercisable
to purchase common stock (or, in the discretion of our board of directors,
Series B Preferred Stock) at a price substantially discounted from the then
current market price of the Common Stock. Our stockholder rights plan could
generally discourage a merger or tender offer involving our securities that is
not approved by our board of directors by increasing the cost of effecting any
such transaction and, accordingly, could have an adverse impact on stockholders
who might want to vote in favor of such merger or participate in such tender
offer.

         While we have no present intention to authorize any additional series
of preferred stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could also
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. The preferred stock may have other
rights, including economic rights senior to the Common Stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value of
the common stock.

         WE HAVE A SIGNIFICANT AMOUNT OF INDEBTEDNESS.

         As a result of the initial offering of the notes, our long-term debt is
$400.0 million. This indebtedness has affected us by:

         o  significantly increasing our interest expense and related debt
            service costs, and

         o  making it more difficult to obtain additional financing.

         We may not generate sufficient cash flow from operations to satisfy the
annual debt service payments that will be required under the notes. This may
require us to use a portion of the proceeds of the notes to pay interest or
borrow additional funds or sell additional equity to meet our debt service
obligations. If we are unable to satisfy our debt service requirements,
substantial liquidity problems could result, which would negatively impact our
future prospects.

         THE MARKET FOR UNRATED DEBT IS SUBJECT TO DISRUPTIONS, WHICH COULD HAVE
AN ADVERSE EFFECT ON THE MARKET PRICE OF THE NOTES.

         Our notes have not been rated. As a result, holders of the notes have
the risks associated with an investment in unrated debt. Historically, the
market for unrated debt has been subject to disruptions that have caused
substantial volatility in the prices of such securities and greatly reduced
liquidity for the holders of such securities. If the notes are traded, they may
trade at a discount from their initial offering price, depending on, among other
things, prevailing interest rates, the markets for similar securities, general
economic conditions and our financial condition, results of operations and
prospects. The liquidity of, and trading markets for, the notes also may be
adversely affected by general declines in the market for unrated debt. Such
declines may adversely affect the liquidity of, and trading markets for, the
notes, independent of our financial performance or prospects. In addition,
certain regulatory restrictions prohibit certain types of financial institutions
from investing in unrated debt, which may further suppress demand for such
securities. We cannot assure you that the market for the notes will not be
subject to similar disruptions. Any such disruptions may have an adverse effect
on the holders of the notes.


                                       49
<PAGE>

                       RATIO OF EARNINGS TO FIXED CHARGES

         The ratio of earnings to fixed charges was negative for periods before
June 30, 2001 because we incurred net losses in the periods prior to that time.
The dollar amounts of the deficiencies for these periods and the ratio of
earnings to fixed charges for the years ended June 30, 2004, 2003, 2002 and 2001
are disclosed below (dollars in thousands):

<TABLE>
<CAPTION>
                                                                    Year Ended June  30,
                                              --------------------------------------------------------------
                                                2004         2003         2002         2001         2000
                                                ----         ----         ----         ----         ----
                                            (Restated)**
<S>                                           <C>          <C>          <C>          <C>
Ratio of earnings to fixed charges*             1:1          3:1          3:1          21:1         N/A
Deficiency of earnings available to
cover fixed charges*                            N/A          N/A          N/A          N/A        ($6,306)
</TABLE>
------------
*  Earnings consist of pre-tax income (loss) plus fixed charges less capitalized
   interest and preferred stock dividends. Fixed charges consist of interest
   expense, including amortization of debt issuance costs and that portion of
   rental expense we believe to be representative of interest.
** See Note 2 to our consolidated financial statements for a discussion of the
   restatement.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.

         Our holdings of financial instruments are comprised of debt securities
and time deposits. All such instruments are classified as securities
available-for-sale. We do not invest in portfolio equity securities or
commodities or use financial derivatives for trading purposes. Our debt security
portfolio represents funds held temporarily pending use in our business and
operations. We manage these funds accordingly. We seek reasonable assuredness of
the safety of principal and market liquidity by investing in rated fixed income
securities while at the same time seeking to achieve a favorable rate of return.
Our market risk exposure consists principally of exposure to changes in interest
rates. Our holdings are also exposed to the risks of changes in the credit
quality of issuers. We typically invest the majority of our investments in the
shorter-end of the maturity spectrum, and at June 30, 2004 all of our holdings
were in instruments maturing in four years or less.

         The table below presents the principal amounts and related weighted
average interest rates by year of maturity for our investment portfolio as of
June 30, 2004 (in thousands).

<TABLE>
<CAPTION>
                               2005          2006         2007         2008        Total      Fair Value
                            ----------    ----------   ----------   ----------  -----------   ----------
<S>                          <C>           <C>          <C>           <C>         <C>           <C>
Fixed Rate                   $27,263       $41,132      $18,440       $9,014      $95,849       $94,701
Average Interest Rate           2.22%         1.92%        2.44%        2.72%        2.18%            -
Variable Rate                      -            -             -            -            -             -
Average Interest Rate              -            -             -            -            -             -
                             -------       -------      -------       ------      -------       -------
                             $27,263       $41,132      $18,440       $9,014      $95,849       $94,701
                             =======       =======      =======       ======      =======       =======
</TABLE>


         Our 4.5% convertible subordinated notes in the principal amount of
$400.0 million due July 1, 2008 have fixed interest rates. The fair value of the
notes was approximately $369.0 million at June 30, 2004. The fair value of fixed
interest rate convertible notes is affected by changes in interest rates and by
changes in the price of our common stock.

         In August 2003, we entered into a Zero Cost Protective Collar
arrangement (the "Collar") to reduce our exposure associated with 1.5 million
shares of NPS common stock we received as part of a merger termination agreement
with NPS. The terms of the Collar are structured so that our investment in NPS
common stock, when combined with the value of the Collar, should secure ultimate
cash proceeds in the range of 85% to 108% of the negotiated fair value per share
of $23.47 (representing a 4.85% discount off the closing price of NPS common
stock on the day before the Collar was executed.) The Collar is considered a
derivative instrument and as such, we carry the Collar at fair value as an asset
or liability on the balance sheet and changes in fair value are recorded as a
charge or credit to earnings in the period of the change. (See Note 15 to the
Notes to the accompanying Consolidated Financial Statements - Merger Termination
Agreement.) The value of the Collar is subject to market conditions that cause
variability associated with its intrinsic and time value. The fair value of the
Collar at June 30, 2004 was a receivable of $1.7 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Financial statements and notes thereto appear on pages F-1 to F-37 of
this Form 10-K/A Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         Not Applicable.


                                       50
<PAGE>

ITEM 9A. CONTROLS AND PROCEDURES

(A)      DISCLOSURE CONTROLS AND PROCEDURES

         Our management, under the direction of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of June 30,
2004. Based on that evaluation and due to the identification of a material
weakness in our internal control over financial reporting, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures were not effective as of June 30, 2004.

         Subsequent to the period covered by this report and in connection with
the preparation and review of our consolidated financial statements for the
fiscal year ended June 30, 2005, we determined that an error occurred in the
accounting for a zero cost protective collar derivative instrument (the
"Collar"). Specifically, the Company did not properly value the Collar and did
not properly apply the provisions of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, to the collar. This resulted in material errors in accumulated other
comprehensive income (loss), other income (expense), other current assets, other
assets, accrued expenses, current deferred tax assets, deferred tax assets, and
income tax expense (benefit). This resulted in the restatements of the Company's
previously issued consolidated financial statements and other financial
information for the quarter and fiscal year to date periods ended September 30,
2003, December 31, 2003, March 31, 2004, June 30, 2004, September 30, 2004,
December 31, 2004 and March 31, 2005. KPMG LLP, our independent registered
accounting firm reviewed this initial accounting in connection with their audit
or review of such period.

(B)      CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

         There were no changes in the Company's internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act, during the quarter ended June 30, 2004 covered by this report that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

         On August 16, 2005 and September 1, 2005, we announced we would need to
amend and restate our consolidated financial statements for the quarter and
fiscal year-to-date periods ended September 30, 2003, December 31, 2003, March
31, 2004, June 30, 2004, September 30, 2004, December 31, 2004 and March 31,
2005. We identified certain computational changes in the valuation of the collar
and therefore, did not properly account for the Collar and did not properly
apply the provisions of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
(SFAS No. 133) to the Collar. This resulted in material errors in accumulated
other comprehensive income (loss), other income (expense), other current assets,
other assets, accrued expenses, current deferred tax assets, deferred tax
assets, and income tax expense (benefit).

         We are finalizing a remediation plan to address this material weakness
in our disclosure controls and procedures pertaining to our application of SFAS
No. 133 and the related restatements of certain previously issued financial
statements. Our remediation plan will include training, education and
comprehensive accounting reviews to ensure that all relevant financial personnel
have the appropriate level of technical expertise to effectively interpret and
apply accounting standards.


                                       51
<PAGE>

                                    PART III

         The information required by Item 10 - Directors and Executive Officers
of the Registrant; Item 11 - Executive Compensation; Item 12 - Security
Ownership of Certain Beneficial Owners and Management, Item 13 - Certain
Relationships and Related Transactions and Item 14 - Principal Accounting Fees
and Services is incorporated into Part III of this Annual Report on Form 10-K/A
by reference to the Proxy Statement for our Annual Meeting of Stockholders
scheduled to be held on December 7, 2004.




                                       52
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         (a)(1) and (2). The response to this portion of Item 15 is submitted as
a separate section of this report commencing on page F-1.

         (a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).

<TABLE>
<CAPTION>
Exhibit                                                                           Reference
Number                              Description                                      No.
------                              -----------                                --------------
<S>      <C>                                                                 <C>
2.1      Mutual Termination Agreement and Release by and among Enzon               +/-+/(3)
         Pharmaceuticals, Inc., NPS Pharmaceuticals, Inc., Momentum
         Merger Corporation, Newton Acquisition Corporation and Einstein
         Acquisition Corporation, dated as of June  4, 2003.

3(i)     Certificate of Incorporation as amended                                   ~(3(i))

3(i)(a)  Amendment to Certificate of Incorporation                                   \\(A)

3(ii)    By laws, as amended                                                      ^(3(ii))

4.1      Indenture dated as of June 26, 2001, between the Company and             +++(4.1)
         Wilmington Trust Company, as trustee, including
         the form of 4 1/2% Convertible Subordinated Note
         due 2008 attached as Exhibit A thereto

4.2      Rights Agreement dated May  17, 2002 between the Company and                 ^ (1)
         Continental Stock Transfer Trust Company, as rights agent

4.3      First Amendment to the Rights Agreement, dated as of February               +/-(1)
         19, 2003 between the Company and Continental Stock Transfer &
         Trust Company, as rights agent.

10.1     Form of Change of Control Agreements dated as of January  20,              #(10.2)
         1995 entered into with an Executive Officer**

10.2     Lease - 300-C Corporate Court, South Plainfield, New Jersey                =(10.3)

10.3     Lease dated April  1, 1995 regarding 20 Kingsbridge Road,                  #(10.7)
         Piscataway, New Jersey

10.4     Lease 300A-B Corporate Court, South Plainfield, New Jersey               ++(10.10)

10.5     Employment Agreement dated May  9, 2001, between the Company and        ///(10.30)
         Arthur J. Higgins**

10.6     Amendment dated May  23, 2001, to Employment Agreement between          ///(10.31)
         the Company and Arthur J. Higgins dated May  9, 2001**

10.7     Form of Restricted Stock Award Agreement between the Company and         ////(4.3)
         Arthur J. Higgins**

10.8     Modification of Lease Dated May  14, 2003 - 300-C Corporate                @(10.8)
         Court, South Plainfield, New Jersey

10.9     Lease - 685 Route 202/206, Bridgewater, New Jersey                      ^^^(10.14)

10.10    Employment Agreement with Ulrich Grau dated as of March  6,             ^^^(10.15)
         2002**

10.11    2001 Incentive Stock Plan as amended**                                   @@(10.23)

10.12    Development, License and Supply Agreement between the Company             ~(10.15)
         and Schering Corporation; dated November  14, 1990, as amended*

10.13    Transition Agreement dated July  2, 2002 between the Company and         ~~(10.16)
         Jeffrey McGuire**

10.14    Asset Purchase Agreement between the Company and Elan                       \(2.1)
         Pharmaceuticals, Inc., dated as of October  1, 2002

10.15    License Agreement between the Company and Elan Pharmaceuticals,         ~~~(10.18)
         Inc., dated November  22, 2002

10.16    Option Agreement between the Company and Arthur J. Higgins,             ~~~(10.19)
         dated as of December  3, 2002**

10.17    Form of Restricted Stock Agreement between the Company and              ~~~(10.20)
         Arthur J. Higgins **

10.18    Royalty Agreement between the Company and Vivo Healthcare               ~~~(10.21)
         Corporation, dated as of October  16, 2002**

10.19    Assignment Agreement between the Company and Vivo Healthcare            ~~~(10.22)
         Corporation, dated as of October  16, 2002**
</TABLE>


                                       53
<PAGE>

<TABLE>
<CAPTION>
Exhibit                                                                       Reference
Number                              Description                                   No.
------                              -----------                              --------
<S>      <C>                                                                 <C>
10.20    Restricted Stock Purchase Agreement dated as of June  4, 2003 by         +/-+/-(4)
         and between Enzon Pharmaceuticals, Inc. and NPS Pharmaceuticals,
         Inc.

10.21    Registration Rights Agreement dated as of June  4, 2003 by and           +/-+/-(5)
         between Enzon Pharmaceuticals, Inc. and NPS Pharmaceuticals, Inc.

10.22    Outside Directors' Compensation Arrangement                                   @@@@

10.23    Amendment No. 2 to Employment Agreement with Arthur Higgins              @@(10.24)
         dated December  3, 2003

10.24    Amended and Restated Employment Agreement with Ulrich Grau dated         @@(10.25)
         December  5, 2003

10.25    Restricted Stock Award Agreement with Ulrich Grau dated                  @@(10.26)
         December  5, 2003

10.26    Separation Agreement with Arthur Higgins dated May  10, 2004            @@@(10.27)

10.27    Development Agreement with Inex Pharmaceuticals dated January           @@@(10.28)
         19, 2004***

10.28    Product Supply Agreement with Inex Pharmaceuticals dated                @@@(10.29)
         January  19, 2004***

10.29    Co-Promotion Agreement with Inex Pharmaceuticals dated January          @@@(10.30)
         19, 2004***

10.30    Employment Agreement with Kenneth J. Zuerblis dated June  14,                 @@@@
         2004, along with a form of Restricted Stock Award Agreement
         between the Company and Mr.  Zuerblis executed as of June  14,
         2004 and a form of Consulting Agreement between the Company and
         Mr.  Zuerblis.

10.31    Executive Deferred Compensation Plan                                          @@@@

12.1     Computation of Ratio of Earnings to Fixed Charges                               <1

21.0     Subsidiaries of Registrant                                                    @@@@

23.0     Consent of KPMG LLP, independent registered accounting firm                     <1

31.1     Certification of Principal Executive Officer pursuant to                        <1
         Section  302 of the Sarbanes-Oxley Act of 2002

31.2     Certification of Principal Financial Officer pursuant to Section                <1
         302 of the Sarbanes-Oxley Act of 2002

32.1     Certification of Principal Executive Officer pursuant to                        <1
         Section  906 of the Sarbanes-Oxley Act of 2002

32.2     Certification of Principal Financial Officer pursuant to Section                <1
         906 of the Sarbanes-Oxley Act of 2002
</TABLE>

<1     Filed herewith

=      Previously filed as an exhibit to the Company's Registration
       Statement on Form S-18 (File No. 2-88240-NY) and incorporated
       herein by reference thereto.

++     Previously filed as an exhibit to the Company's Annual Report on
       Form 10-K for the fiscal year ended June 30, 1993 and incorporated
       herein by reference thereto.

+++    Previously filed as an exhibit to the Company's Registration
       Statement on Form S-3 (File No. 333-67509) filed with the Commission
       and incorporated herein by reference thereto.

#      Previously filed as an exhibit to the Company's Quarterly Report on
       Form 10-Q for the quarter ended March 31, 1995 and incorporated
       herein by reference thereto.

///    Previously filed as an exhibit to the Company's Current Report on
       Form 8-K filed with the Commission on June 13, 2001 and incorporated
       herein by reference thereto.

////   Previously filed as an exhibit to the Company's Registration
       Statement on Form S-8 (File No. 333-64110) filed with the Commission
       and incorporated herein by reference thereto.

 ^     Previously filed as an exhibit to the Company's Form 8-A (File No.
       000-12957) filed with the Commission on May 22, 2002 and
       incorporated herein by reference thereto.

                                       54
<PAGE>

^^     Previously filed as an exhibit to the Company's Current Report on
       Form 8-K filed with the Commission on May 22, 2002 and incorporated
       herein by reference thereto.

~     Previously filed as an exhibit to the Company's Annual Report on Form
      10-K for the fiscal year ended June 30, 2002 and incorporated herein
      by reference thereto.

~~    Previously filed as an exhibit to the Company's Quarterly Report on
      Form 10-Q for the quarter ended September 30, 2002 and incorporated
      herein by reference thereto.

~~~   Previously filed as an exhibit to the Company's Quarterly Report on
      Form 10-Q for the quarter ended December 31, 2002 and incorporated
      herein by reference thereto.

\     Previously filed as an exhibit to the Company's Current Report on
      Form 8-K filed on October 2, 2002 and incorporated herein by reference
      thereto.

\\    Previously filed as an exhibit to the Company's Current Report on
      Form 8-K filed on December 10, 2002 and incorporated herein by
      reference thereto.

+/-   Previously filed as an exhibit to the Company's Form 8-A12G/A (File
      No. 000-12957) filed with the Commission on February 20, 2003 and
      incorporated herein by reference thereto.

+/+/- Previously filed as an exhibit to the Company's Amendment No. 1 to
      Schedule 13D (File No. 005-46256) filed with the Commission on
      February 28, 2003 and incorporated herein by reference thereto.

@     Previously filed as an exhibit to the Company's Annual Report on
      Form 10-K for the fiscal year ended June 30, 2003.

@@    Previously filed as a exhibit to the Company's Quarterly Report on
      Form 10-Q for the quarter ended December 31, 2003.

@@@   Previously filed as an exhibit to the Company's Quarterly Report on
      Form 10-Q for the quarter ending March 31, 2004.

@@@@  Previously filed as an exhibit to the Company's Annual Report on Form
      10-K for the fiscal year ended June 30, 2004.

*     Copy omits information for which confidential treatment has been granted.

**    Required to be filed pursuant to Item 601(b) (10) (ii) (A) or (iii) of
      Regulation S-K.

***   Portions of this exhibit have been redacted and filed separately with
      the Commission pursuant to a confidential treatment request.

         (b) Reports on Form 8-K.

         On April 26, 2004, we filed with the Commission a Current Report on
Form 8-K dated April 23, 2004 reporting Robert L. Parkinson's resignation from
our Board of Directors.

         On May 5, 2004, we filed with the Commission a Current Report on Form
8-K dated May 5, 2004 reporting our financial results for the quarter ended
March 31, 2004.

         On May 21, 2004, we filed with the Commission a Current Report on Form
8-K dated May 21, 2004 reporting that the New drug Application (NDA) for MARQIBO
(vincristine sulfate liposomes injection) has been accepted by the United States
Food and Drug Administration (FDA) and has been granted a standard review
designation.

         On June 8, 2004, we filed with the Commission a Current Report on Form
8-K dated June 7, 2004 reporting a summary of clinical advancements at the 40th
Annual Meeting of the American Society of Clinical Oncology (ASCO) in New
Orleans, Louisiana.

         On August 3, 2004, we filed with the Commission a Current Report on
Form 8-K dated August 2, 2004 reporting that Nektar Therapeutics had entered
into a license agreement with Pfizer involving our PEG technology.

         On August 13, 2004, we filed with the Commission a Current Report on
Form 8-K dated August 9, 2004 reporting with sadness the passing of one of our
directors, David W. Golde, M.D.

         On August 17, 2004, we filed with the Commission a Current Report on
Form 8-K dated August 17, 2004 reporting our financial results for the year
ended June 20, 2004.


                                       55
<PAGE>

                                   SIGNATURES

                  Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                     ENZON PHARMACEUTICALS, INC.
                                           (Registrant)


Dated:  September 28, 2005           By:  /s/ Jeff Buchalter
                                          ---------------------------------
                                              Jeff Buchalter
                                              Chairman, President and
                                              Chief Executive Officer
                                              (Principal Executive Officer)


Dated:  September 28, 2005           By: /s/ Craig A. Tooman
                                         ----------------------------------
                                             Craig A. Tooman
                                             Executive Vice President,
                                             Finance and Chief Financial Officer
                                             (Principal Financial Officer)


                                       56
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

                                     INDEX

                                                                           Page
                                                                         -------
Report of Independent Registered Public Accounting Firm                    F-2
Consolidated Financial Statements:
 Consolidated Balance Sheets -- June 30, 2004 restated and 2003            F-3
 Consolidated Statements of Operations -- Years ended June 30,
 2004 restated, 2003 and 2002                                              F-4
 Consolidated Statements of Stockholders' Equity -- Years
 ended June 30, 2004 restated, 2003 and 2002                               F-5
 Consolidated Statements of Cash Flows -- Years ended
 June 30, 2004 restated, 2003 and 2002                                     F-7
 Notes to Consolidated Financial Statements -- Years ended
 June 30, 2004 restated, 2003 and 2002                                     F-8
Consolidated Financial Statement Schedule:
 Schedule II -- Valuation and Qualifying Accounts                         F-37




                                      F-1
<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Stockholders
Enzon Pharmaceuticals, Inc.:


We have audited the consolidated financial statements of Enzon Pharmaceuticals,
Inc. and subsidiaries (the Company) as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the consolidated financial statement schedule as listed in the
accompanying index. These consolidated financial statements and consolidated
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enzon
Pharmaceuticals, Inc. and subsidiaries as of June 30, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2004, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As discussed in Note 2, the Company restated its consolidated financial
statements as of and for the year ended June 30, 2004.


/s/ KPMG LLP

Short Hills, New Jersey
August 17, 2004, except as to Note 2(a) and
Note 2(b) of the Notes to Consolidated Financial
Statements, which are as of November 10, 2004
and September 23, 2005, respectively.


                                      F-2
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                             JUNE 30, 2004 AND 2003
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                              2004            2003
                                                                            ---------       ---------
                                                                           (Restated)
                                                                            (Note 2)
<S>                                                                         <C>             <C>
                                     ASSETS
Current assets:
 Cash and cash equivalents                                                  $  91,532       $  66,752
 Short-term investments                                                        27,119          25,047
 Investments in equity securities                                              23,625            --
 Accounts receivable, net                                                      25,977          33,173
 Inventories                                                                   11,215          11,786
 Deferred tax assets                                                            7,005          14,564
 Other current assets                                                           4,989           1,525
                                                                            ---------       ---------
   Total current assets                                                       191,462         152,847
                                                                            ---------       ---------
Property and equipment, net                                                    34,859          32,593
Marketable securities                                                          67,582          61,452
Investments in equity securities and convertible note                          14,281          56,364
Deferred tax assets                                                            61,177          52,889
Amortizable intangible assets, net                                            194,067         211,975
Goodwill                                                                      150,985         150,985
Other assets                                                                    7,997           9,461
                                                                            ---------       ---------
                                                                              530,948         575,719
                                                                            ---------       ---------
   Total assets                                                             $ 722,410       $ 728,566
                                                                            =========       =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Accounts payable                                                           $   8,663       $  12,809
 Accrued expenses                                                              14,001          10,262
 Accrued interest                                                               9,000           9,000
 Income taxes payable                                                            --             2,274
                                                                            ---------       ---------
   Total current liabilities                                                   31,664          34,345
                                                                            ---------       ---------
 Accrued rent                                                                     343             449
 Unearned revenue                                                               1,312           2,188
 Notes payable                                                                400,000         400,000
                                                                            ---------       ---------
                                                                              401,655         402,637
                                                                            ---------       ---------
Commitments and contingencies
Stockholders' equity:
 Preferred stock-$.01 par value, authorized 3,000,000 shares; no                 --              --
  shares issued and outstanding in 2005 and 2004
 Common stock--$.01 par value, authorized 90,000,000 shares issued and            438             435
  outstanding 43,750,934 shares in 2004 and 43,518,359 shares in 2003
 Additional paid-in capital                                                   322,486         322,488
 Accumulated other comprehensive loss                                          (7,330)           (159)
 Deferred compensation                                                         (3,571)         (4,040)
 Accumulated deficit                                                          (22,932)        (27,140)
                                                                            ---------       ---------
   Total stockholders' equity                                                 289,091         291,584
                                                                            ---------       ---------
   Total liabilities and stockholders' equity                               $ 722,410       $ 728,566
                                                                            =========       =========
</TABLE>

       The accompanying notes are an integral part of these consolidated
                             financial statements.

                                      F-3
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    YEARS ENDED JUNE 30, 2004, 2003 AND 2002
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                            2004            2003             2002
                                                                          ---------       ---------       ---------
                                                                         (Restated)
                                                                          (Note 2)
<S>                                                                       <C>             <C>             <C>
Revenues:
 Product sales, net                                                       $ 107,922       $  59,264       $  22,183
 Manufacturing revenue                                                       12,911           8,742            --
 Royalties                                                                   47,707          77,589          53,329
 Contract revenue                                                             1,031             811             293
                                                                          ---------       ---------       ---------
   Total revenues                                                           169,571         146,406          75,805
                                                                          ---------       ---------       ---------
Costs and expenses:
 Cost of sales and manufacturing revenue                                     46,986          28,521           6,078
 Research and development                                                    34,769          20,969          18,427
 Selling, general and administrative                                         47,001          30,571          16,545
 Amortization of acquired intangibles                                        13,432           9,211             142
 Write-down of carrying value of investment                                   8,341          27,237            --
 Acquired in-process research and development                                12,000            --              --
                                                                          ---------       ---------       ---------
   Total costs and expenses                                                 162,529         116,509          41,192
                                                                          ---------       ---------       ---------
Operating income                                                              7,042          29,897          34,613
                                                                          ---------       ---------       ---------
Other income (expense):
 Investment income, net                                                      13,396           8,942          18,681
 Interest expense                                                           (19,829)        (19,828)        (19,829)
 Merger termination fee, net                                                   --            26,897            --
 Other, net                                                                   6,776              41           3,218
                                                                          ---------       ---------       ---------
                                                                                343          16,052           2,070
                                                                          ---------       ---------       ---------
Income before tax provision (benefit)                                         7,385          45,949          36,683
Tax provision (benefit)                                                       3,177             223          (9,123)
                                                                          ---------       ---------       ---------
Net income                                                                $   4,208       $  45,726       $  45,806
                                                                          =========       =========       =========
Basic earnings per common share                                           $    0.10       $    1.06       $    1.07
                                                                          =========       =========       =========
Diluted earnings per common share                                         $    0.10       $    1.05       $    1.04
                                                                          =========       =========       =========
Weighted average number of common shares outstanding -- basic                43,350          43,116          42,726
                                                                          =========       =========       =========
Weighted average number of common shares and dilutive potential
common shares outstanding                                                    43,522          43,615          44,026
                                                                          =========       =========       =========
</TABLE>

       The accompanying notes are an integral part of these consolidated
                             financial statements.


                                      F-4
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    YEARS ENDED JUNE 30, 2004, 2003 AND 2002
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                          Preferred stock          Common stock
                                         -------------------   --------------------
                                           Number               Number                Additional    Accumulative Other
                                            of         Par       of         Par        Paid-in         Comprehensive
                                           Shares      Value    Shares      Value      Capital         Income (Loss)
                                         ----------  -------   ---------   --------   ------------  ------------------
<S>                                      <C>         <C>      <C>          <C>        <C>                 <C>
Balance, June  30, 2001                         7       $  -    41,991       $420       $257,682          $  885
Common stock issued for exercise of
non-qualified stock options                     -          -     1,009         10          5,172               -
Amortization of deferred compensation
                                                -          -         -          -              -               -
Other comprehensive income:
 Net income                                     -          -         -          -              -               -
 Net change in unrealized gain on
    available for sale securities, net
    of tax                                      -          -         -          -              -             211

Total other comprehensive income
                                         ----------  -------   ---------   --------   ------------  -----------------
Balance, June  30, 2002                         7          -    43,000       $430       $262,854          $1,096
Common stock issued for exercise of
Non-qualified stock options                     -          -       305          3          1,370               -
Issuance of restricted common stock             -          -       200          2          3,558               -
Conversion and redemption of preferred
stock                                          (7)         -        14          -            (25)              -
Amortization of deferred compensation           -          -         -          -              -               -
Dividends on preferred stock                    -          -         -          -              -               -
Tax benefit recognized related to stock
option exercises                                -          -         -          -         54,731               -
Other comprehensive income:                     -          -         -          -              -               -
 Net income
    Net change in unrealized loss on
    available for sale securities, net
    of tax                                      -          -         -          -              -          (1,255)

 Total  other comprehensive loss
                                         ----------  -------   ---------   --------   ------------  -----------------
Balance, June 30, 2003, carried forward         -          -     43,519       $435      $322,488            ($159)

<CAPTION>

                                              Deferred         Accumulated
                                            Compensation         Deficit          Total
                                           ----------------  ----------------  ------------
<S>                                       <C>               <C>                <C>
Balance, June  30, 2001                         ($1,509)        ($118,489)        $138,989
Common stock issued for exercise of
non-qualified stock options                           -                 -            5,182
Amortization of deferred compensation
                                                    307                 -              307
Other comprehensive income:
 Net income                                           -            45,806           45,806
 Net change in unrealized gain on
    available for sale securities, net
    of tax                                            -                 -              211
                                                                               ------------
Total other comprehensive income                                                    46,017
                                           ----------------  ----------------  ------------
Balance, June  30, 2002                         ($1,202)         ($72,683)        $190,495
Common stock issued for exercise of
Non-qualified stock options                           -                 -            1,373
Issuance of restricted common stock              (3,560)                -                -
Conversion and redemption of preferred
stock                                                 -                 -              (25)
Amortization of deferred compensation               722                 -              722
Dividends on preferred stock                          -              (183)            (183)
Tax benefit recognized related to stock
option exercises                                      -                 -           54,731
Other comprehensive income:                           -            45,726           45,726
 Net income
    Net change in unrealized loss on
    available for sale securities, net
    of tax                                            -                 -           (1,255)
                                                                               ------------
 Total  other comprehensive loss                                                    44,471
                                           ----------------  ----------------  ------------
Balance, June 30, 2003, carried forward         ($4,040)         ($27,140)        $291,584
</TABLE>
                                   (continued)



                                      F-5
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--CONTINUED
                        YEARS ENDED 2004, 2003 AND 2002
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                              Preferred stock         Common stock
                                            --------------------  ---------------------
                                              Number                 Number                 Additional   Accumulative Other
                                                of         Par        of          Par        Paid-in      Comprehensive
                                              Shares       Value     Shares      Value       Capital       Income (Loss)
                                            ----------   -------  ----------   --------    -----------   ------------------
<S>                                         <C>          <C>      <C>          <C>          <C>          <C>
Balance, June 30, 2003, brought forward            -      $    -   43,519        $435       $322,488             ($159)
Common stock issued for exercise of
non-qualified stock options                        -           -       97           1            526                -
Issuance of restricted common stock                -           -      340           4          4,072                -
Cancellation of restricted common stock            -           -     (215)         (2)        (4,478)               -
Common stock issued for Independent
Director's Stock Plan                              -           -       10           -            143                -
Amortization of deferred compensation              -           -        -           -              -                -
Other                                              -           -        -           -           (265)               -
Other comprehensive income:
 Net income (Restated, Note 2)                     -           -        -           -              -                -
    Net change in unrealized loss on
    available for sale securities, net of
    reclassification adjustments, net of
    of tax (Restated, Note 2)                      -           -        -           -              -           (4,651)
    Net change in unrealized loss on NPS
    Investment, net of tax (Restated,
    Note 2)                                        -           -        -           -              -           (2,520)

    Total comprehensive loss
    (Restated, Note 2)
                                            ----------   -------  ----------   --------    ------------  ------------------
Balance, June 30, 2004
   (Restated, Note 2)                              -      $    -   43,751        $438       $322,486          ($7,330)
                                            ==========   =======  ==========   ========    ============  ==================

<CAPTION>
                                                  Deferred          Accumulated
                                                Compensation          Deficit          Total
                                              ------------------  ---------------  --------------
<S>                                           <C>                 <C>              <C>
Balance, June  30, 2003, brought forward          ($4,040)           ($27,140)       $291,584
Common stock issued for exercise of
non-qualified stock options                             -                   -             527
Issuance of restricted common stock                (4,076)                  -               -
Cancellation of restricted common stock             3,163                   -          (1,317)
Common stock issued for Independent
Director's Stock Plan                                   -                   -             143
Amortization of deferred compensation               1,382                   -           1,382
Other                                                   -                   -            (265)
Other comprehensive income:
 Net income (Restated, Note 2)                          -               4,208           4,208
    Net change in unrealized loss on
    available for sale securities, net of
    reclassification adjustments, net of
    tax (Restated, Note 2)                              -                   -          (4,651)
    Net change in unrealized loss on NPS
    Investment, net of tax (Restated,
    Note 2)                                             -                   -          (2,520)
                                                                                   --------------
    Total comprehensive loss
    (Restated, Note 2)                                                                  (2,963)
                                              ------------------  ---------------  --------------
Balance, June 30, 2004
   (Restated, Note 2)                             ($3,571)           ($22,932)       $289,091
                                              ==================  ===============  ==============
</TABLE>


       The accompanying notes are an integral part of these consolidated
                             financial statements.

                                      F-6
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                    YEARS ENDED JUNE 30, 2004, 2003 AND 2002
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                              2004          2003         2002
                                                                           ------------  -----------  ------------
                                                                           (Restated)
                                                                            (Note 2)
<S>                                                                         <C>          <C>           <C>
Cash flows from operating activities:
 Net income                                                                $   4,208       $  45,726       $  45,806
Adjustments to reconcile net income to net cash provided by operating
activities:
  Depreciation and amortization                                               22,072          13,264             972
  Amortization of bond premium (discount)                                        939          (1,261)         (2,680)
  Amortization of debt issue costs                                             1,829           1,829           1,829
  Gain on sale of investment in equity securities                            (13,004)         (2,318)         (1,185)
  Deferred income taxes                                                          488          (4,379)         (9,000)
  Acquired in process research and development                                12,000            --              --
Non-cash (credit) expense for stock-based compensation                           (57)            830             391
Non-cash write down of carrying value of investment                            8,341          27,237            --
  Change in fair value of derivative                                          (1,728)           --              --
  Non-cash merger termination fee                                               --           (34,552)           --
Changes in operating assets and liabilities:
 Decrease (increase) in accounts receivable, net                               7,196          (7,123)        (14,963)
 Decrease (increase) in inventories                                              571          (1,000)           (362)
 (Increase) decrease in other current assets                                  (1,017)          2,649          (1,337)
 Decrease (increase) in deposits                                                  23             571            (386)
 (Decrease) increase in accounts payable                                      (4,146)          8,283            (144)
 Increase in accrued expenses                                                    444           6,276           1,981
 Increase in accrued interest                                                   --              --             8,750
 (Decrease) increase in income taxes payable                                  (2,274)          2,274            --
 Increase in accrued rent                                                       (106)           (104)            (29)
 Increase in unearned revenue                                                  1,312            --              --
                                                                           ---------       ---------       ---------
  Net cash provided by operating activities                                   37,091          58,202          29,643
                                                                           ---------       ---------       ---------
Cash flows from investing activities:
 Purchase of property and equipment                                           (6,430)        (11,225)         (7,503)
 Purchase of intangible asset                                                   --              --           (15,000)
Purchase of acquired in process research and development                     (12,000)           --              --
 Acquisition of ABELCET business                                                --          (369,265)           --
 License of DEPOCYT product                                                     --           (12,186)           --
 Purchase of cost method investments                                            --              --           (48,341)
 Proceeds from sale of investment in equity securities                        46,923            --              --
 Proceeds from sale of marketable securities                                  33,444         371,544         271,734
 Purchase of marketable securities                                           (79,315)       (142,232)       (511,997)
 Maturities of marketable securities                                           4,540          57,000          80,260
 Decrease in long-term investments                                              --              --              (260)
                                                                           ---------       ---------       ---------
  Net cash used in investing activities                                      (12,838)       (106,364)       (231,107)
                                                                           ---------       ---------       ---------
Cash flows from financing activities:
 Proceeds from issuance of common stock                                          527           1,265           5,098
 Redemption of preferred stock                                                  --               (26)           --
 Preferred stock dividend paid                                                  --              (183)           --
                                                                           ---------       ---------       ---------
  Net cash provided by financing activities                                      527           1,056           5,098
                                                                           ---------       ---------       ---------
Net increase (decrease) in cash and cash equivalents                          24,780         (47,106)       (196,366)
Cash and cash equivalents at beginning of year                                66,752         113,858         310,224
                                                                           ---------       ---------       ---------
Cash and cash equivalents at end of year                                   $  91,532       $  66,752       $ 113,858
                                                                           =========       =========       =========
</TABLE>


       The accompanying notes are an integral part of these consolidated
                             financial statements.


                                      F-7
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) COMPANY OVERVIEW

         Enzon Pharmaceuticals, Inc. ("Enzon" or "Company") is a
biopharmaceutical company that develops, manufactures and markets enhanced
therapeutics for life-threatening diseases through the application of its
proprietary technologies. The Company was originally incorporated in 1981. The
Company's operations include sales of ADAGEN(R), ONCASPAR(R), DEPOCYT(R) and
ABELCET, royalties earned, which are primarily earned on sales of PEG-INTRON(R);
contract manufacturing revenue, and license fees. The manufacturing and
marketing of pharmaceutical products, in the United States is subject to
stringent governmental regulation, and the sale of any of the Company's products
for use in humans in the United States requires the prior approval of the United
States Food and Drug Administration ("FDA").

(2) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

         (A)  NOVEMBER 2004 RESTATEMENT

         In October 2004, the Company determined that its previously issued
consolidated financial statements for the year ended June 30, 2004, and the
quarterly information for the quarter ended June 30, 2004 required restatement.
The restatement is due to correct a change relating to the accounting for a
derivative hedging instrument and an error in assessing the realizeability of
deferred tax assets related to the unrealized loss on available-for-sale
securities included in accumulated other comprehensive loss.

         As described in Note 15, "Merger Termination Agreement", the Company
entered into a zero cost protective collar arrangement to reduce its exposure to
changes in the fair value of the 1.5 million common shares of NPS
Pharmaceutical, Inc. ("NPS"), which the Company holds. Under the Company's
protective collar arrangement, when its underlying shares of NPS common stock
become unrestricted and freely tradable the Company is required to deliver to
the financial institution, which holds the protective collar arrangement, as
posted collateral, a corresponding number of shares of NPS common stock. In
accordance with this requirement during the quarter and year ended June 30,
2004, the Company sold and repurchased shares of common stock of NPS. In
accounting for such sales and repurchases, the unrealized gain previously
included in accumulated other comprehensive income prior to the sale and
repurchase of the respective shares is realized and recognized as other income.
The accounting error resulted from the accounting for the sales of the
securities underlying the derivative which resulted in a misallocation between
other income and accumulated other comprehensive loss for the quarter and year
ended June 30, 2004. Other income was overstated by $964,000 for the year ended
June 30, 2004 and accumulated other comprehensive loss as of June 30, 2004 was
overstated by $1.5 million.

         In reevaluating the realizeability of the Company's deferred tax assets
resulting from the excess of tax basis over book basis of available-for-sale
securities, it was determined that it is more likely than not that the deferred
tax asset related to available-for-sale securities, which would result in a
capital loss carryforward when realized, will not be realizable and that a
valuation allowance is required for the deferred tax asset. As such, there was a
decrease to deferred tax assets and an increase to the accumulated other
comprehensive loss in the amount of $2.5 million as of June 30, 2004.


                                      F-8
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The following tables show the impact of the restatement on the relevant
captions from the Company's consolidated financial statements as of and for the
year ended June 30, 2004. These tables contain only the changed balances and do
not represent the complete consolidated balance sheet as of June 30, 2004 or
consolidated statement of operations for the year ended June 30, 2004 (in
thousands, except per share amounts).

                      CHANGES TO CONSOLIDATED BALANCE SHEET

                                  JUNE 30, 2004

<TABLE>
<CAPTION>
                                                Previously                       Previously
                                                 Reported       Adjustments       Restated
                                              --------------  ---------------  --------------
<S>                                             <C>             <C>             <C>
Current deferred tax assets                     $   9,133       ($  2,128)      $   7,005
Total current assets                              170,353          (2,128)        168,225
Non-current deferred tax assets                    61,502            (325)         61,177
Total non-current assets                          554,510            (325)        554,185
Total assets                                      724,863          (2,453)        722,410
Accumulated other comprehensive loss               (3,546)         (1,489)         (5,035)
Accumulated deficit                               (24,263)           (964)        (25,227)
Total stockholders' equity                        291,544          (2,453)        289,091
Total liabilities and stockholders' equity        724,863          (2,453)        722,410
</TABLE>

                CHANGES TO CONSOLIDATED STATEMENTS OF OPERATIONS

                            YEAR ENDED JUNE 30, 2004

<TABLE>
<CAPTION>
                                                  Previously                  Previously
                                                   Reported     Adjustments    Restated
                                                 ------------   -----------   -----------
<S>                                               <C>           <C>           <C>
Other, net                                         $ 3,860       ($  964)      $ 2,896
Total other income (expense)                        (2,573)         (964)       (3,537)
Income before tax provision (benefit)                4,469          (964)        3,505
Net income                                           2,877          (964)        1,913
Basic earnings per common share                       0.07         (0.03)         0.04
Diluted earnings per common share                     0.07         (0.03)         0.04
</TABLE>

         The 2004 restatement did not result in any changes to cash and cash
equivalents as of June 30, 2004 or any changes to the net cash flows from
operations, investing or financing activities in the consolidated statement of
cash flows for the year ended June 30, 2004 although it did impact certain
components of net cash flow from operations.

         As a result of the adjustments discussed above, modifications were
required to previously reported footnotes as follows: Note 3, Note 4, Note
5, Note 15, Note 16 and Note 24.

         (B)  SEPTEMBER 2005 RESTATEMENT

         In August and September 2005, the Company concluded that its previously
issued consolidated financial statements and other financial information for the
quarter and fiscal year-to-date periods ended September 30, 2003, December 31,
2003, March 31, 2004 and June 30, 2004 required restatement with respect to its
accounting for computational changes in the valuation of and the application of
hedge accounting for a derivative hedging instrument. The restatement is due to
the accounting for and the application of hedge accounting for a zero cost
protective collar (the "Collar") arrangement under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended (SFAS No. 133).

         In August 2005, the Company determined that the initial sale of NPS
common stock in November 2003 resulted in the termination of the existing
hedging relationship and that the Company was unable to meet certain fair value
hedging criteria pursuant to SFAS No. 133 at that time to re-designate the
hedging relationship. Accordingly, the Company terminated its hedge accounting
treatment in November 2003, which resulted in the unrealized gains and losses on
the NPS common stock underlying the derivative hedging instrument previously
included in other income (expense) to be recorded in accumulated other
comprehensive income (loss) in the consolidated balance sheet. The accounting
change results in a correction between other income (expense) and accumulated
other comprehensive income (loss) for the quarters and fiscal year-to-date
periods ended December 31, 2003, March 31, 2004 and June 30, 2004.


                                      F-9
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         In addition, the Collar is carried at fair value on the Company's
balance sheet and represents either a payable or receivable from the financial
institution, with changes in the fair value being charged or credited to "other
income (expense)" in the consolidated statement of operations. The Company has
identified certain computational changes in the valuation of the Collar. The
accounting change results in an increase or decrease in the carrying value of
the Collar for the quarter and fiscal year-to-date periods ended September 31,
2003, December 31, 2003, March 31, 2004 and June 30, 2004 and a corresponding
charge or credit to "other income (expense)" for the corresponding quarter and
fiscal year-to-date periods then ended. The Company has also made certain
reclassifications between non-current and current assets and liabilities of a
portion of the balance associated with the Collar and NPS common stock to
reflect the timing of the maturity of the Collar instrument and related sale of
NPS common stock.

         The following tables show the impact of the restatement and
reclassifications on the relevant captions from the Company's consolidated
financial statements as of and for the periods indicated. These tables contain
only the changed balances and do not represent the complete consolidated balance
sheet as of such period or consolidated statements of operations for the period
then ended (in thousands, except per share amounts).

                      CHANGES TO CONSOLIDATED BALANCE SHEET

                                  JUNE 30, 2004

<TABLE>
<CAPTION>
                                                                   Previously
                                                                    Restated      Adjustments       Restated
                                                                  -------------- ---------------  --------------
<S>                                                               <C>            <C>               <C>
Investment in equity securities                                    $      --      $  23,625         $  23,625
Other current assets                                                   5,377           (388)            4,989
Total current assets                                                 168,225         23,237           191,462
Investments in equity securities and convertible note                 37,906        (23,625)           14,281
Other assets                                                           7,609            388             7,997
Total non-current assets                                             554,185        (23,237)          530,948
Accumulated other comprehensive loss                                  (5,035)        (2,295)           (7,330)
Accumulated deficit                                                  (25,227)         2,295           (22,932)
</TABLE>

                CHANGES TO CONSOLIDATED STATEMENTS OF OPERATIONS

                            YEAR ENDED JUNE 30, 2004

<TABLE>
<CAPTION>
                                                                   Previously
                                                                    Restated      Adjustments       Restated
                                                                  -------------- ---------------  --------------
<S>                                                                   <C>            <C>               <C>
Other, net                                                            $2,896         $3,880            $6,776
Total other income (expense)                                          (3,537)         3,880               343
Income before tax provision                                            3,505          3,880             7,385
Tax provision                                                          1,592          1,585             3,177
Net income                                                             1,913          2,295             4,208
Basic earnings per common share                                         0.04           0.06              0.10
Diluted earnings per common share                                       0.04           0.06              0.10
</TABLE>

         The 2005 restatement did not result in any changes to cash and cash
equivalents as of June 30, 2004 or any changes to the net cash flows from
operating, investing or financing activities in the consolidated statements of
cash flows for the year ended June 30, 2004 although it did result in certain
reclassifications among certain components of net cash flow from operations.

         As a result of the adjustments discussed above, modifications were
required to previously restated filed footnotes as follows: Note 3, Note 4, Note
5, Note 15, Note 16 and Note 24.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

                                      F-10
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     CASH EQUIVALENTS

         The Company considers all highly liquid debt instruments with original
maturities not exceeding three months to be cash equivalents. Cash equivalents
consist primarily of U.S. Government instruments, commercial paper, and money
market funds.

     MARKETABLE SECURITIES

The Company classifies its investments in debt and marketable equity securities
as available-for-sale since the Company does not have the intent to hold them to
maturity. Debt and marketable equity securities are carried at fair market
value, with the unrealized gains and losses (which are deemed to be temporary),
net of related tax effect, included in the determination of comprehensive income
and reported in stockholders' equity. The fair value of substantially all
securities is determined by quoted market prices.

         The cost of the debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. The amortization, along with
realized gains and losses, is included in interest income. The cost of
securities is based on the specific identification method.

         A decline in the market value of any security below cost that is deemed
to be other-than-temporary results in a reduction in carrying amount to fair
value. The impairment is charged to earnings and a new cost basis for the
security is established. Dividend and interest income are recognized when
earned.

         As of June 30, 2004, investments with unrealized losses have been in a
continuous unrealized loss position for less than 12 months.

         The amortized cost, gross unrealized holding gains or losses, and fair
value for the Company's available-for-sale securities by major security type at
June 30, 2004 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                              Gross               Gross
                                          Amortized         Unrealized         Unrealized          Fair
                                             Cost         Holding Gains      Holding Losses       Value*
                                        -------------   ----------------    ----------------    ------------
<S>                                     <C>                 <C>                <C>              <C>
U.S. Government agency debt                $24,017            $ 5                 ($351)           $23,671
U.S. corporate debt                         71,832              6                  (808)            71,030
                                        -------------   ----------------    ----------------    ------------
                                           $95,849            $11               ($1,159)           $94,701
                                        =============   ================    ================    ============
</TABLE>

*  Included in short-term investments $27,119 and marketable securities $67,582.

         The amortized cost, gross unrealized holding gains or losses, and fair
value for securities available-for-sale by major security type at June 30, 2003
were as follows (in thousands):

<TABLE>
<CAPTION>
                                                              Gross               Gross
                                          Amortized        Unrealized           Unrealized          Fair
                                             Cost         Holding Gains       Holding Losses       Value*
                                        -------------   ----------------    -----------------    ------------
<S>                                     <C>             <C>                 <C>                  <C>
U.S. Government agency debt               $  26,518         $  166                $   -           $  26,684
U.S. corporate debt                          59,804             11                    -              59,815
                                        -------------   ----------------    -----------------    ------------
                                          $  86,322         $  177                $   -           $  86,499
                                        =============   ================    =================    ============
</TABLE>

*  Included in short-term investments $25,047 and marketable securities $61,452.

                                      F-11
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The amortized cost, gross unrealized holding gains or losses, and fair
value for securities available-for-sale by major security type at June 30, 2002
were as follows (in thousands):

<TABLE>
<CAPTION>
                                                              Gross               Gross
                                        Amortized           Unrealized          Unrealized            Fair
                                           Cost           Holding Gains       Holding Losses         Value*
                                     -----------------   -----------------   -----------------   ---------------
<S>                                  <C>                 <C>                 <C>                 <C>
U.S. Government agency debt                $339,638           $2,052                $ -               $341,690
U.S. corporate debt                          29,764                -               (298)                29,466
                                     -----------------   -----------------   -----------------   ---------------
                                           $369,402           $2,052              $(298)              $371,156
                                     =================   =================   =================   ===============
</TABLE>

*  Included in short-term investments $75,165 and marketable securities
   $295,991.

         Gross realized gains from the sale of investment securities included in
net income for the years ended June 30, 2004, 2003 and 2002 were $13.0 million,
$2.3 million and $1.2 million, respectively.

         Maturities of debt securities classified as available-for-sale at June
30, 2004 were as follows (in thousands):

                                     Amortized Cost             Fair Value
                                   -------------------    -------------------
Years ended June 30,
2005                                      $27,263                $27,119
2006                                       41,132                 40,569
2007                                       18,440                 18,180
2008                                        9,014                  8,833
                                   -------------------    -------------------
                                          $95,849                $94,701
                                   ===================    ===================

     FINANCIAL INSTRUMENTS

         The carrying values of cash and cash equivalents, accounts receivable,
other assets, accounts payable and accrued expenses included in the Company's
consolidated balance sheets approximated their fair values at June 30, 2004 and
2003.

     REVENUE RECOGNITION

         Revenues from product sales and manufacturing revenue are recognized at
the time of shipment and a provision is made at that time for estimated future
credits, chargebacks, sales discounts, rebates and returns (estimates are based
on historical trends). These sales provision accruals, except for rebates which
are recorded as a liability, are presented as a reduction of the accounts
receivable balances and totaled $9.5 million, including $7.8 million in reserves
for chargebacks, as of June 30, 2004. For June 30, 2003 these sales provision
accruals are presented as a reduction of the accounts receivable balances,
except for rebates, which are recorded as a liability, and totaled $8.1 million,
including $6.3 million in reserves for chargebacks. The Company continually
monitors the adequacy of the accrual by comparing the actual payments to the
estimates used in establishing the accrual. The Company ships product to
customers primarily FOB shipping point and utilizes the following criteria to
determine appropriate revenue recognition: pervasive evidence of an arrangement
exists, delivery has occurred, selling price is fixed and determinable and
collection is reasonably assured.

         Royalties under the Company's license agreements with third parties are
recognized when earned through the sale of product by the licensor. The Company
does not participate in the selling or marketing of products for which it
receives royalties.

         In accordance with SAB 104, up-front nonrefundable fees associated with
license and development agreements where the Company has continuing involvement
in the agreement, are recorded as deferred revenue and recognized over the
estimated service period. If the estimated service period is subsequently
modified, the period over which the up-front fee is recognized is modified
accordingly on a prospective basis. SAB No. 104 updates the guidance in SAB No.
101 and requires companies to identify separate units of accounting based on the
consensus reached on Emerging Issues Task Force ("EITF") Issue No. 00-21 Revenue
Arrangements with Multiple Deliverables ("EITF 00-21"). EITF 00-21 provides
guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes, and if this division is
required, how the arrangement consideration should be allocated among the
separate units of accounting. EITF 00-21 is effective for revenue arrangements
entered into in quarters beginning after June 15, 2003. If the deliverables in a
revenue arrangement constitute separate units of accounting according to the
EITF's separation criteria, the revenue-recognition policy must be determined
for each identified unit. If the arrangement is a single unit of accounting
under the separation criteria, the revenue-recognition policy must be determined
for the entire arrangement. The adoption of EITF 00-21 did not impact the
Company's historical consolidated financial position or results of operations,
but could affect the timing or pattern of revenue recognition for future
collaborative research and/or license agreements. Prior to the adoption of EITF
00-21, revenues from the achievement of research and development process, were
recognized when and if the milestones were achieved.

                                      F-12
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     INVENTORIES

         Inventories are carried at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method and includes the cost of
raw materials, labor and overhead.

     PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. Depreciation of fixed assets
is provided by straight-line methods over estimated useful lives. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized in operations for the period. Amortization of leasehold improvements
is calculated using the straight-line method over the remaining term of the
lease or the life of the asset, whichever is shorter. The cost of repairs and
maintenance is charged to operations as incurred; significant renewals and
improvements are capitalized.

     BUSINESS COMBINATIONS

         In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations. SFAS No. 141 requires that all business combinations be accounted
for under a single method-the purchase method. Current U.S. Accounting Standards
no longer permit the use of the pooling-of-interests method. SFAS No. 141
requires that the purchase method be used for business combinations initiated
after June 30, 2001. Subsequent to SFAS No. 141 becoming effective, the Company
completed the acquisition of the North American ABELCET business, which was
accounted for using the purchase method of accounting.

     GOODWILL AND OTHER INTANGIBLE ASSETS

         Goodwill represents the excess of costs over the fair value of
identifiable net assets of businesses acquired. The Company adopted the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of July 1,
2002. In accordance with the provisions of SFAS No. 142, goodwill and other
intangible assets determined to have an indefinite useful life acquired in a
purchase business combination are not subject to amortization, are tested at
least annually for impairment, and are tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. The Company
completed its annual goodwill impairment test on May 31, 2004, which indicated
that goodwill was not impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset's fair value. This determination is
made at the Company level because the Company is in one reporting unit and
consists of two steps. First, the Company determines the fair value of its
reporting unit and compares it to its carrying amount. Second, if the carrying
amount of its reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the reporting unit's
goodwill over the implied fair value of that goodwill. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation, in accordance with FASB Statement
No. 141, Business Combinations. The residual fair value after this allocation is
the implied fair value of the company's goodwill. Recoverability of amortizable
intangible assets is determined by comparing the carrying amount of the asset to
the future undiscounted net cash flow to be generated by the asset. The
evaluations involve amounts that are based on management's best estimate and
judgment. Actual results may differ from these estimates. If recorded values are
less than the fair values, no impairment is indicated. SFAS No. 142 also
requires that intangible assets with estimated useful lives be amortized over
their respective estimated useful lives. At the time of adoption of SFAS No.
142, the Company did not have any goodwill or other intangible assets with an
indefinite useful life. As of June 30, 2004, the Company does not have
intangibles with indefinite useful lives, other than goodwill.


                                      F-13
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS

         In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, such as property, plant, and equipment and
purchased intangibles subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Assets to be disposed of would be
separately presented in the consolidated balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the consolidated balance sheet.

         Intangible assets are capitalized and amortized on a straight-line
basis over their respective expected useful lives, up to a 15-year period.

     ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

         Costs to acquire in-process research and development projects and
technologies which have no alternative future use at the date of acquisition are
expensed as incurred.

     DERIVATIVE FINANCIAL INSTRUMENTS

         The Company addresses certain financial exposures through a controlled
program of risk management that, at times includes the use of derivative
financial instruments. The Company does not use derivative financial instruments
for trading or speculative purposes. In August 2003, the Company entered into a
Zero Cost Protective Collar arrangement with a financial institution to reduce
the exposure associated with the shares of NPS Pharmaceuticals, Inc. common
stock received in June 2003 as a result of the termination of the proposed
merger between the Company and NPS Pharmaceuticals, Inc. (see Note 15). The
contract was designated as a fair value hedge through November 2003 and
accordingly, the change in fair value of the derivative and the hedged item
(NPS common stock) were recorded in the statement of operations while the
derivative was designated as an effective hedge. The Company formally assesses,
both at inception of the hedge and periodically on an ongoing basis, whether the
derivative is highly effective in offsetting changes in the fair value of the
hedged item. Beginning in November 2003, it was determined that the derivative
was not effective and the Company discontinued hedge accounting prospectively.
(See Note 2(b)).

     RESEARCH AND DEVELOPMENT

         All research and development costs are expensed as incurred. These
include the following types of costs incurred in performing research and
development activities: salaries and benefits, allocated overhead and occupancy
costs, clinical trials and related clinical manufacturing costs, contract
services, and other outside costs.

     INCOME TAXES

         Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income or expense in the period that includes
the enactment date of the rate change.

                                      F-14
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     FOREIGN CURRENCY TRANSACTIONS

         Gains and losses from foreign currency transactions, such as those
resulting from the translation and settlement of receivables and payables
denominated in foreign currencies, are included in the consolidated statements
of operations. The Company does not currently use derivative financial
instruments to manage the risks associated with foreign currency fluctuations.
The Company recorded a loss on foreign currency transactions of approximately
$57,000 for the year ended June 30, 2004. There were no gains or losses from
foreign currency transactions for the years ended June 30, 2003 and 2002. Gains
and losses from foreign currency transactions are included as a component of
other income (expense).

     STOCK-BASED COMPENSATION PLANS

         The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant of options to employees and members of the Board of Directors only
if the current market price of the underlying stock exceeded the exercise price.
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
established accounting for stock-based employee compensation plans. As allowed
by SFAS 123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123, as amended.

         When the exercise price of employee or director stock options is less
than the fair value of the underlying stock on the grant date, the Company
records deferred compensation for the difference and amortizes this amount to
expense over the vesting period of the options. Options or stock awards issued
to non-employees and consultants are recorded at their fair value as determined
in accordance with SFAS No. 123 and Emerging Issues Task Force ("EITF") No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services, and recognized
over the related vesting period.

         The following table illustrates the effect on net income and net income
per share as if the compensation cost for the Company's stock option grants had
been determined based on the fair value at the grant dates for awards consistent
with the fair value method of SFAS No. 123 (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                                                              Years ended June  30,
                                                                   -----------------------------------------------
                                                                       2004              2003            2002
                                                                   -------------       ----------     ------------
                                                                    (Restated)
<S>                                                               <C>                 <C>             <C>
Net income available to common stockholders:
As reported                                                             $4,208           $45,715        $45,792
Add stock-based employee compensation expense included in
reported net income, net of tax (1)                                        328               433            307
Deduct total stock-based employee compensation expense determined
under fair-value-based method for all awards, net of tax (1)           (11,436)           (8,933)       (22,751)
                                                                   -------------       ----------     ------------
Pro forma net income (loss)                                            ($6,900)          $37,215        $23,348
                                                                   =============       ==========     ============
Net income (loss) per common share-basic:
 As reported                                                             $0.10             $1.06          $1.07
 Pro forma                                                              ($0.16)            $0.86          $0.55
Net income (loss) per common share-diluted
 As reported                                                             $0.10             $1.05          $1.04
 Pro forma                                                              ($0.16)            $0.85          $0.53
</TABLE>

(1)   Information for 2004 and 2003 has been adjusted for taxes using estimated
      tax rates of 35% and 40%, respectively. Information for 2002 has not been
      tax effected as a result of the Company's utilization of net operating
      loss carryforwards in that year.

                                      F-15
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The pro forma effects on net income available to common stockholders
and net income per common share for 2004, 2003 and 2002 may not be
representative of the pro forma effects in future years since compensation cost
is allocated on a straight-line basis over the vesting periods of the grants,
which extends beyond the reported years.

         The weighted-average fair value per share was $8.10, $12.50 and $29.27
for stock options accounted for under SFAS No. 123 and granted in 2004, 2003 and
2002, respectively. The fair value of stock options was estimated using the
Black-scholes option-pricing model. The Black-scholes model considers a number
of variables, including the exercise price and the expected life of the option,
the current price of common stock, the expected volatility and the dividend
yield of the underlying common stock, and the risk-free interest rate during the
expected term of the option. The following table summarizes the weighted average
assumptions used:

<TABLE>
<CAPTION>
                                                         Years ended June  30,
                                             ------------------------------------------------
                                                 2004             2003             2002
                                             --------------  ----------------  --------------
<S>                                           <C>              <C>              <C>
Risk-free interest rate                           4.00%            2.97%            4.00%
Expected stock price volatility                     69%              75%              78%
Expected term until exercise (years)              4.73             4.21             4.23
Expected dividend yield                              0%               0%               0%
</TABLE>

     CASH FLOW INFORMATION

         Cash payments for interest were approximately $18.0 million, $18.0
million and $9.3 million for the years ended June 30, 2004, 2003 and 2002,
respectively. There were $3.8 million and $2.1 million of tax payments made for
the years ended June 30, 2004 and June 30, 2003, respectively. There were no
income tax payments made for the year ended June 30, 2002.

     RECLASSIFICATIONS

         Certain amounts previously reported have been reclassified to conform
to the current year's presentation.

(4) COMPREHENSIVE INCOME

         SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for reporting and presentation of comprehensive income and its components in a
full set of financial statements. Comprehensive income consists of net income
and net unrealized gain (loss) on securities and is presented in the
Consolidated Statements of Stockholders' Equity.

         The following table reconciles net income to comprehensive income
(loss) (in thousands):

<TABLE>
<CAPTION>
                                                                      Years Ended June  30,
                                                            ------------------------------------------
                                                                2004          2003          2002
                                                            -------------  -----------  --------------
                                                             (Restated)
<S>                                                             <C>          <C>           <C>
Net income                                                      $4,208       $45,726       $45,806
  Other comprehensive income:
  Unrealized (loss) gain on securities that arose
    during the year, net of tax                                (4,651)        1,007            211
  Reclassification adjustment for loss included
    in net income, net of tax                                  (2,520)       (2,262)             -
                                                           -------------  -----------   -------------
                                                               (7,171)       (1,255)           211
                                                           -------------  -----------   -------------
  Total comprehensive income (loss)                           ($2,963)      $44,471        $46,017
                                                           =============  ===========   =============
</TABLE>

                                      F-16
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(5) EARNINGS PER COMMON SHARE

         Basic earnings per share is computed by dividing the net income
available to common stockholders adjusted for only cumulative undeclared
preferred stock dividends for the relevant period, by the weighted average
number of shares of Common Stock issued and outstanding during the periods. For
purposes of calculating diluted earnings per share for the years ended June 30,
2004, 2003 and 2002, the denominator includes both the weighted average number
of shares of Common Stock outstanding and the number of dilutive Common Stock
equivalents. The number of dilutive Common Stock equivalents includes the effect
of non-qualified stock options calculated using the treasury stock method and
the number of shares issuable upon conversion of the Series A Preferred Stock
that was outstanding as of June 30, 2003 and 2002. There were no Series A
Preferred Stock outstanding as of June 30, 2004. The number of shares issuable
upon conversion of the Company's 4.5% Convertible Subordinated Notes due 2008
(the "Notes") and the effect of the vesting of certain restricted stock and
certain stock options using the treasury stock method have not been included as
the effect of their inclusion would be antidilutive. As of June 30, 2004, 2003
and 2002, the Company had 9,644,000, 6,514,000 and 6,955,000 potentially
dilutive common shares outstanding respectively, that could potentially dilute
future earnings per share calculations.

         The following table represents the reconciliation of the numerators and
denominators of the basic and diluted EPS computations for net earnings
available for Common Stockholders for the years ended June 30, 2004, 2003 and
2002 (in thousands):

<TABLE>
<CAPTION>
                                                              Years ended June  30,
                                                         ---------------------------------
                                                          2004         2003         2002
                                                         -------      -------      -------
                                                       (Restated)
<S>                                                      <C>          <C>          <C>
Net income                                               $ 4,208      $45,726      $45,806
  Less: preferred stock dividends                           --             11           14
                                                         -------      -------      -------
  Net income available to common stockholders            $ 4,208      $45,715      $45,792
                                                         =======      =======      =======

Weighted average number of common shares                  43,350       43,116       42,726
   outstanding - basic
Effect of dilutive common stock equivalents:
 Conversion of preferred stock                              --             13           16
 Exercise of stock options                                   172          486        1,284
                                                         -------      -------      -------

                                                          43,522       43,615       44,026
                                                         =======      =======      =======
</TABLE>


(6) BUSINESS COMBINATION

     (A) ACQUISITION OF NORTH AMERICAN ABELCET BUSINESS

         On November 22, 2002, the Company acquired the North American rights
and operational assets associated with the development, manufacture, sales and
marketing of ABELCET(R) (Amphotericin B Lipid Complex Injection) (the "North
American ABELCET business") from Elan Corporation, plc ("Elan"), for $360.0
million plus acquisition costs of approximately $9.3 million. The acquisition is
being accounted for by the purchase method of accounting in accordance with SFAS
No. 141 "Business Combinations", with the results of operations and cash flows
for the North American ABELCET business included in the Company's consolidated
results from the date of acquisition.

         The total purchase price of the acquisition was (in thousands):

           Cash                                                     $360,000
           Acquisition costs, primarily legal,
             investment banking and accounting fees                    9,264
                                                                    ---------
                                                                    $369,264
                                                                    =========

                                      F-17
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               The purchase price was allocated to the tangible and identifiable
intangible assets acquired based on their estimated fair values at the
acquisition date. The excess of the purchase price over the fair value of
identifiable assets and liabilities acquired amounted to $151.0 million and was
allocated to goodwill.

         The following table summarizes the estimated fair values of the assets
acquired as of the acquisition date (in thousands):

              Inventories                                 $  8,572
              Property, plant and equipment                 13,707
              Amortizable intangible assets                196,000
              Goodwill                                     150,985
                                                          --------
                                                          $369,264
                                                          ========


         Property, plant and equipment and intangible assets were recorded at
the estimated fair value of the assets. Amortizable intangible assets include
the following components as determined by a third party valuation (in
thousands):

                                                                 Estimated lives
                                                                 ---------------
              Product Patented Technology           $ 64,400         12 years
              Manufacturing Patent                    18,300         12 years
              NDA Approval                            31,100         12 years
              Trade name and other product rights     80,000         15 years
              Manufacturing Contract                   2,200          3 years
                                                    --------
                                                    $196,000
                                                    =========


         Goodwill will not be amortized but will be tested for impairment at
least annually. For income tax purposes, the entire amount of goodwill is
deductible and is being amortized over a 15 year period.

     (B) ELAN/MEDEUS MANUFACTURING AGREEMENT

         As a part of the ABELCET acquisition, the Company entered into a
long-term manufacturing and supply agreement with Elan, whereby the Company
continues to manufacture two products, ABELCET and MYOCET. In February 2004,
Elan sold its European Sales and Marketing business to Medeus Pharma Ltd.
("Medeus") and transferred the manufacturing and supply agreement to Medeus.
Under the terms of the 2002 ABELCET acquisition agreement, Medeus retained the
right to market ABELCET in any markets outside of the U.S., Canada and Japan.
ABELCET is approved for use in approximately 26 countries for primary and/or
refractory invasive fungal infections.

         The manufacturing agreement with Medeus as successor to Elan requires
the Company to supply Medeus with ABELCET and MYOCET through November 21, 2011.
For the period from November 22, 2002 until June 30, 2004, the Company supplied
ABELCET and MYOCET at fixed transfer prices which approximated its manufacturing
cost. From July 1, 2004 to the termination of the agreement, the Company will
supply these products at manufacturing cost plus fifteen percent.

         The agreement also provides that through June 30, 2004, Enzon
calculated the actual product manufacturing costs on an annual basis and, to the
extent that this amount was greater than the respective transfer prices, Medeus
reimbursed Enzon for such differences. Conversely, if such actual manufacturing
costs were less than the transfer price, Enzon reimbursed Medeus for such
differences. In addition, for the periods from closing to June 30, 2003 and the
one year period ended June 30, 2004, respectively, Medeus was responsible for
reimbursing Enzon for Medeus' share of the plant's excess capacity for such
periods. This calculation was based on Medeus' portion of the total products
manufactured at the plant.

                                      F-18
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     (C) PRO FORMA FINANCIAL INFORMATION

         The pro forma results of operations are presented for illustrative
purposes only and are not necessarily indicative of the operating results that
would have occurred if the transaction had been consummated at the dates
indicated, nor is it necessarily indicative of future operating results of the
combined companies and should not be construed as representative of these
amounts for any future dates or periods.

         The following pro forma results of operations of the Company for the
years ended June 30, 2003 and 2002, respectively, assume the acquisition of the
ABELCET Business occurred as of July 1, 2002 and 2001, respectively and assumes
the purchase price has been allocated to the assets purchased based on fair
values at the date of acquisition (in thousands, except per share amounts):

                                                     Years ended June  30,
                                                   -------------------------
                                                    2003             2002
                                                  --------         ---------
         Product sales                            $104,408         $118,672
         Total revenues                            182,808          173,294
         Net income                                 45,240           60,416
         Pro forma earnings per share:
         Basic                                       $1.05            $1.41
         Diluted                                     $1.04            $1.37

(7) INVENTORIES

         Inventories, net of reserves consist of the following (in thousands):

                                                     Years ended June  30,
                                                -----------------------------
                                                   2004               2003
                                                ---------          ----------
         Raw materials                           $ 3,143            $ 4,349
         Work in process                           3,716              3,392
         Finished goods                            4,356              4,045
                                                ---------          ----------
                                                 $11,215            $11,786
                                                =========          ==========


(8) INTANGIBLE ASSETS

         Intangible assets consist of the following (in thousands):

                                            Years ended June  30,    Estimated
                                            ---------------------     Useful
                                               2004        2003       Lives
                                             ---------   --------   -----------
         Product Patented Technology         $ 64,400    $ 64,400     12 years
         Manufacturing Patent                  18,300      18,300     12 years
         NDA Approval                          31,100      31,100     12 years
         Trade name and other product rights   80,000      80,000     15 years
         Manufacturing Contract                 2,200       2,200      3 years
         Patent                                 2,092       2,092    1-5 years
         Product Acquisition Costs             26,194      26,194  10-14 years
                                             ---------   --------
                                              224,286     224,286
         Less: Accumulated amortization        30,219      12,311
                                             ---------   --------
                                             $194,067    $211,975
                                             =========   ========

                                      F-19
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Amortization charged to operations relating to intangible assets
totaled $17.9 million, $12.3 million, and $142,000 for the years ended June 30,
2004, 2003 and 2002, respectively. Amortization expense for the intangibles and
certain other product acquisition costs acquired with the North American ABELCET
business in November 2002 (Note 6) is expected to be approximately $15.5 million
per year.

 (9) PROPERTY AND EQUIPMENT

         Property and equipment consist of the following (in thousands):

                                          Years ended June  30,     Estimated
                                          ---------------------      Useful
                                            2004         2003         lives
                                          ---------   ---------    ------------
         Land                              $ 1,500     $ 1,500
         Building                            4,800       4,800        7 years
         Leasehold improvements             16,324      13,881     3-15 years
         Equipment                          24,694      21,097      3-7 years
         Furniture and fixtures              2,721       2,564        7 years
         Vehicles                               38          55        3 years
                                          ---------   --------
                                            50,077      43,897
         Less: Accumulated depreciation     15,218      11,304
                                          ---------   --------
                                           $34,859     $32,593
                                          =========   ========

         During the years ended June 30, 2004 and 2003, the Company's fixed
asset disposals were approximately $249,000 and $270,000, respectively. The
assets disposed of were fully depreciated.

         Depreciation charged to operations relating to property and equipment
totaled $4.2 million, $2.4 million and $817,000 for the years ended June 30,
2004, 2003 and 2002, respectively.

(10) ACCRUED EXPENSES

         Accrued expenses consist of (in thousands):

                                                 Years ended June  30,
                                                 ----------------------
                                                   2004          2003
                                                 -------       --------
         Accrued wages and vacation              $ 5,247       $ 4,157
         Accrued Medicaid rebates                  2,011         1,904
         Unearned revenue                          1,641           958
         Other                                     5,102         3,243
                                                 -------       --------
                                                 $14,001       $10,262
                                                 =======       ========

(11) LONG-TERM DEBT

         In June 2001, the Company completed a private placement of $400.0
million in Convertible Subordinated Notes due July 1, 2008 (the "Notes"). The
Company received net proceeds from this offering of $387.2 million, after
deducting costs associated with the offering. The net amount of the debt issue
costs totaled $7.3 million at June 30, 2004 and are included in other assets in
the accompanying consolidated balance sheet. The Notes bear interest at an
annual rate of 4.5%. Accrued interest on the Notes was approximately $9.0
million as of June 30, 2004. The holders may convert all or a portion of the
Notes into Common Stock at any time on or before July 1, 2008. The Notes are
convertible into Common Stock at a conversion price of $70.98 per share, subject
to adjustment in certain events. The Notes are subordinated to all existing and
future senior indebtedness. After July 7, 2004, the Company may redeem any or
all of the Notes at specified redemption prices, plus accrued and unpaid
interest to the day preceding the redemption date. Upon the occurrence of a
"fundamental change", as defined in the indenture governing the Notes, holders
of the Notes may require the Company to redeem the Notes at a price equal to 100
percent of the principal amount. In August 2001, the Company filed a
registration statement which was declared effective by the U.S. Securities and
Exchange Commission covering the resale of the Notes and the Common Stock
issuable upon conversion of the Notes. The fair value of the 4.5% Notes was
approximately $369.0 million and $327.0 million at June 30, 2004 and 2003,
respectively.

                                      F-20
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(12) STOCKHOLDERS' EQUITY

     SHAREHOLDER RIGHTS PLAN

         During May 2002, the Company adopted a shareholder rights plan ("Rights
Plan"). The Rights Plan involves the distribution of one preferred share
purchase right ("Right") as a dividend on each outstanding share of the
Company's common stock to each holder of record on June 3, 2002. Each Right
shall entitle the holder to purchase one-thousandth of a share of Series B
Preferred Stock ("Preferred Shares") of the Company at a price of $190.00 per
one-thousandth of Preferred Share. The Rights are not immediately exercisable
and will become exercisable only upon the occurrence of certain events. If a
person or group acquires, or announces a tender or exchange offer that would
result in the acquisition of 15 percent or more of the Company's common stock
while the stockholder rights plan remains in place, then, unless (1) the Rights
are redeemed by the Company for $0.01 per right or (2) the Board of Directors
determines that a tender or exchange offer for all of the outstanding Common
Stock of the Company is in the best interest of the Company and the
stockholders, the Rights will be exercisable by all Right holders except the
acquiring person or group for one share of the Company or in certain
circumstances, shares of the third party acquirer, each having a value of twice
the Right's then-current exercise price. The Rights will expire on May 16, 2012.

     SERIES A PREFERRED STOCK

         During the year ended June 30, 2003, the remaining outstanding 6,000
shares of the Company's Series A Cumulative Convertible Preferred Stock ("Series
A Preferred Stock" or "Series A Preferred Shares") were converted to 13,636
shares of Common Stock. Accrued dividends of $156,000 on the Series A Preferred
Shares that were converted, were settled by cash payments. Additionally, cash
payments totaling $4.00 were made for fractional shares related to the
conversions. During the fiscal year ended June 30,2003 the remaining 1,000
shares of Series A Preferred Stock were redeemed and settled by a cash payment
of $25,000 and accrued dividends of $26,000. There were no conversions of Series
A Preferred Stock during the year ended June 30, 2002.

         The Company's Series A Preferred Shares were convertible into Common
Stock at a conversion rate of $11 per share. The value of the Series A Preferred
Shares for conversion purposes was $25 per share. Holders of the Series A
Preferred Shares were entitled to an annual dividend of $2 per share, payable
semiannually, but only when and if declared by the Board of Directors, out of
funds legally available. As of June 30, 2002, undeclared accrued dividends in
arrears were $172,000 or $24.54 per share and $158,000 or $22.54 per share,
respectively. Due to the conversion or redemption of all Series A Preferred
shares prior to June 30, 2003 all dividends have been settled as of June 30,
2003.

     COMMON STOCK

         During the year ended June 30, 2004, the Company issued 340,000 shares
of restricted common stock and restricted common stock units to certain members
of management which vest over a five year vesting period. Total compensation
cost of approximately $4.1 million, calculated based on the fair value of the
shares on the issuance date, is being recognized as an expense over the vesting
period. For the year ended June 30, 2004, $504,000 was recorded as compensation
expense, which reflects the reversal of $1.29 million of compensation expense
previously recognized related to 215,000 shares of cancelled restricted stock as
a result of the May 10, 2004 resignation of the Company's Chief Executive
Officer and the cancellation of his unvested restricted stock. In the quarter
ended June 30, 2004, the Company reversed $1.18 million of compensation expense
which was previously recognized related to these restricted shares, including
$764,000 which was recognized for the nine months ended March 31, 2004.

         During the year ended June 30, 2003, the Company issued 200,000 shares
of restricted common stock to its President and Chief Executive Officer. Total
compensation expense of approximately $3.6 million, calculated based on the fair
value of the shares on the issuance date, was being recognized over the five
year vesting period.

         During the year ended June 30, 2001, the Company issued 25,000 shares
of restricted Common Stock to its President and Chief Executive Officer. Such
shares were issued in conjunction with an employment agreement and vest ratably
over five years. Total compensation expense of approximately $1.5 million was
being recognized over the five year vesting period.

         The board of directors has the authority to issue up to 3.0 million
shares of preferred stock, par value $0.01 per share, and to determine the price
and terms, including preferences and voting rights, of those shares without
stockholder approval.

                                      F-21
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Holders of shares of Common Stock are entitled to one vote per share on
matters to be voted upon by the stockholders of the Company.

         As of June 30, 2004, the Company has reserved its common shares for
special purposes as detailed below (in thousands):

         Non-Qualified and Incentive Stock Plans                8,248
         Shares issuable upon conversion of Notes               5,635
                                                               -------
                                                               13,883
                                                               =======

(13) INDEPENDENT DIRECTORS' STOCK PLAN

         From December 3, 1996 through December 31, 2002, the Company's
Independent Directors' Stock Plan, which provided for compensation in the form
of quarterly grants of Common Stock to non-executive, independent directors
serving on the Company's Board of Directors. Each independent director was
granted shares of Common Stock equivalent to $2,500 per quarter plus $500 per
Board of Director's meeting attended. The number of shares issued was based on
the fair market value of Common Stock on the last trading day of the applicable
quarter. In October 2000, the Compensation Committee of the Board of Directors
amended the Plan to provide that the Independent Directors will be entitled to
elect to receive up to 50% of the fees payable in cash with the remainder of the
fee to be paid in Common Stock. During the years ended June 30, 2003, and 2002,
the Company issued 2,500, and 1,000 shares of Common Stock, respectively, to
independent directors, pursuant to the Independent Directors' Stock Plan.

         Through December 31, 2002, the Company's Independent Directors received
compensation for serving on the Board of Directors payable in shares of the
Company's common stock or a combination of shares of common stock and cash under
the Company's Independent Directors' Stock Plan. In September of 2002, the
Compensation Committee of the Board of Directors decided to terminate the
Independent Directors' Stock Plan as a stand-alone plan and to instead issue
shares of the Company's common stock under the Independent Directors' Stock Plan
pursuant to the 2001 Incentive Stock Plan. During fiscal 2003, each Independent
Director was entitled to compensation of $2,500 per quarter and $500 for each
meeting attended by such Independent Director under the Independent Directors'
Stock Plan. In 2002, in connection with the reduction of shares subject to the
option granted under the regular grant to Independent Directors' the
Compensation Committee of the Board of Directors approved a change, effective
for the quarter ended March 31, 2002 and for each quarter thereafter, to the
compensation under the Independent Directors Stock Plan to include the payment
of $500 for committee meetings attended by the Independent Directors which are
held on a day when no Board of Directors meeting is held. Under the Independent
Directors' Stock Plan the Independent Directors were entitled to elect to
receive up to 50% of the fees payable under the Independent Directors' Stock
Plan in cash, with the remainder of the fees to be paid in shares of the
Company's common stock. Fees payable and shares issuable under the Independent
Directors' Stock Plan were paid annually at the end of the calendar year.

         Effective December 31, 2003, the Compensation Committee of the Board of
Directors approved the termination of the existing compensation program for
directors and implemented a new compensation structure. The new compensation
structure entitles each independent director to an annual cash payment of
$20,000. In addition, annual cash payments of $7,000 for chair of the audit and
finance committee, $3,500 for any other chair on any other committee of the
board and $1,000 for each meeting attended will be made to directors. The
structure also includes an annual option grant of 5,000 shares of common stock
issued on the first trading day of each year at the closing price on that day,
which will vest in one year and restricted stock units with an aggregate value
of $25,000 on the first trading day following June 30 based on the closing price
on the date of grant, which will vest in thirds on each of the first three
anniversaries after the date of grant. During the year ended June 30, 2004, the
Company recorded cash compensation expense of $136,000 for the Independent
Directors.

(14) STOCK OPTION PLANS

         As of June 30, 2004, 8,248,000 shares of Common Stock were reserved for
issuance pursuant to options under two separate plans, the Non-Qualified Stock
Option Plan (the "Stock Option Plan") and the 2001 Incentive Stock Plan (the
"2001 Incentive Stock Plan"), which may be granted to employees, non-employee
directors or consultants to the Company. The exercise price of the options
granted must be at least 100% of the fair market value of the stock at the time
the option is granted. Options may be exercised for a period of up to ten years
from the date they are granted.

                                      F-22
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         In November 1987, the Company's Board of Directors adopted a
Non-Qualified Stock Option Plan (the "Stock Option Plan"). This plan has
7,900,000 shares of Common Stock authorized for the issuance of stock options.
Some of the options granted contain accelerated vesting provisions, under which
the vesting and exercisability of such shares will accelerate if the closing
price of the Company's Common Stock exceeds $100 per share for at least twenty
consecutive days as reported by the NASDAQ National Market. The other terms and
conditions of the options generally are to be determined by the Board of
Directors, or an option committee appointed by the Board, at their discretion.

         In October 2001, the Board of Directors adopted, and in December 2001
the stockholders approved, the 2001 Incentive Stock Plan. The 2001 Incentive
Stock Plan has 6,000,000 authorized shares for the grant of stock options and
other stock-based awards to employees, officers, directors, consultants, and
independent contractors providing services to Enzon and its subsidiaries as
determined by the Board of Directors or by a committee of directors designated
by the Board of Directors to administer the 2001 Incentive Stock Plan.

         The following is a summary of the activity in the Company's Stock
Option Plans which include the 1987 Non-Qualified Stock Option Plan and the 2001
Incentive Stock Plan (shares in thousands):

<TABLE>
<CAPTION>
                                                                             Weighted
                                                                              Average
                                                                             Exercise           Range of
                                                             Shares            Price             Prices
                                                           ------------   ----------------  -------------------
<S>                                                        <C>             <C>              <C>
Outstanding at June  30, 2001                                   3,284           $24.98       $ 1.88 to $73.22
    Granted at exercise prices which equaled                                    $44.39       $25.10 to $65.86
      the fair market value on the date of grant                1,399
 Exercised                                                     (1,008)           $4.13        $2.00 to $37.38
 Canceled                                                         (31)          $41.56       $22.31 to $70.69
                                                           ------------

Outstanding at June  30, 2002                                   3,644           $38.07        $1.88 to $73.22
    Granted at exercise prices which equaled
      the fair market value on the date of grant                1,133           $19.65       $11.35 to $24.76
 Exercised                                                       (305)           $4.49        $2.03 to $14.13
 Canceled                                                        (534)          $40.63       $11.70 to $71.00
                                                           ------------

Outstanding at June  30, 2003                                   3,938           $35.02        $1.88 to $73.22
    Granted at exercise prices which equaled
      the fair market value on the date of grant                2,151           $13.81       $10.66 to $17.72
 Exercised                                                        (98)           $5.40       $10.72 to $17.17
 Canceled                                                      (1,153)          $36.21       $11.37 to $71.00
                                                           ------------
Outstanding at June  30, 2004                                   4,838           $25.90        $1.87 to $71.38
                                                           ============
</TABLE>

         Of the options the Company granted during the fiscal year ended June
30, 2002, 245,000 options contained accelerated vesting provisions based on the
achievement of certain milestones.




                                      F-23
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         As of June 30, 2004, the Stock Option Plans had options outstanding and
exercisable by price range as follows (shares in thousands):

<TABLE>
<CAPTION>
                                              Weighted
                                               Average             Weighted                             Weighted
       Range of                               Remaining             Average                             Average
       Exercise             Options          Contractual           Exercise             Options         Exercise
        Prices            Outstanding           Life                 Price            Exercisable        Price
-----------------------  ---------------   ----------------    ------------------    --------------  ---------------
<S>                        <C>               <C>                 <C>                   <C>            <C>
$ 1.87 - $11.37               686               5.33                $ 7.14                406            $ 4.29
$11.41 - $14.13               325               8.68                $12.50                 57            $13.82
$14.15 - $14.15               785               9.61                $14.15                  -                 -
$14.16 - $15.13               599               9.72                $15.09                  4            $14.55
$15.15 - $18.40               505               5.22                $17.53                303            $17.59
$18.41 - $28.17               589               6.76                $23.14                245            $24.61
$29.75 - $45.98               544               6.86                $43.51                251            $42.51
$47.38 - $70.00               774               2.71                $61.83                721            $62.31
$71.00 - $71.38                31               6.32                $71.24                 21            $71.22
                         ---------------                                             ------------
                             4,838              6.71                                    2,008           $35.37
                         ===============                                             ============
</TABLE>

(15) MERGER TERMINATION AGREEMENT

         On June 4, 2003, the Company entered into a merger termination
agreement with NPS Pharmaceuticals, Inc. ("NPS") to terminate the companies'
previous plan of merger dated February 19, 2003. In accordance with the mutual
termination agreement between the two companies, the Company received 1.5
million shares of NPS common stock. The termination agreement imposes certain
restrictions with respect to the transferability of the underlying shares
including limiting the maximum number of shares that can be transferred each
month after the registration statement relating to the shares was declared
effective to 125,000 shares. Considering such restrictions, 1.1 million shares
were valued at $26.7 million, which was the fair value of NPS stock on June 4,
2003 and in accordance with SFAS No. 115, "Accounting for certain Investments in
Debt and Equity Securities", ("SFAS 115") and the balance of 375,000 shares were
considered as restricted stock as defined under the scope exception provisions
of SFAS 115. The restricted stock was valued at $7.8 million by applying a 12%
discount on the related fair value based on a valuation performed by an
independent third-party consulting firm. Total consideration received aggregated
$34.6 million. The Company also recorded $7.7 million in costs incurred related
to the proposed merger with NPS (primarily investment banking, legal and
accounting fees). The net gain of approximately $26.9 million was recorded as
other income in the Consolidated Statement of Operations for the year ended June
30, 2003.

         In August 2003, the Company entered into a zero cost protective collar
arrangement (the "Collar") with a financial institution to reduce the exposure
associated with the 1.5 million shares of NPS common stock received as part of
the merger termination agreement. By entering into this equity collar
arrangement and taking into consideration the underlying put and call option
strike prices, the terms are structured so that the Company's investment in NPS
stock, when combined with the value of the Collar, should secure ultimate cash
proceeds in the range of 85% to 108% of the negotiated fair value per share of
$23.47 (representing a 4.85% discount off of the closing price of NPS common
stock on the day before the collar was executed). The Collar matures in four
separate three-month intervals beginning in November 2004 and ending in August
2005, at which time the Company received the proceeds from the sale of the
securities. The amount due at each maturity date was determined based on the
market value of NPS' common stock on such maturity date, as well as the value of
the Collar. The contract required the Company to maintain a minimum cash balance
of $30.0 million and additional collateral up to $10.0 million (as defined)
under certain circumstances with the financial institution. The strike prices of
the put and call options are subject to certain adjustments in the event a
dividend from NPS was received. The Collar is considered a derivative instrument
and as such, the fair value is recorded in other income in the consolidated
statement of operations. The change in fair value is recorded in other income in
the consolidated statement of operations. At June 30, 2004

                                      F-24
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


the Company had a receivable to the financial institution of $1.7 million.
During the year ended June 30, 2004, the Company recorded unrealized gains of
$1.7 million, as a component of other income (expense) representing the change
in fair value of the Collar. During the year ended June 30, 2004 the Company
recorded unrealized gains of $2.3 million related to the change in the fair
value of the NPS common stock.

         The Company began selling and buying back the underlying NPS common
stock in November 2003, which resulted in the termination of the hedging
relationship. During the period from August 2003 through the date the hedging
relationship was terminated, the NPS common stock had appreciated $5.7 million
in value, of which $2.3 million was recorded in other income in the consolidated
statement of operations and $2.1 million, net of tax, was recorded as a
component of other comprehensive income in the Statement of Stockholders Equity
during the year ended June 30, 2004. The $2.1 million gain recognized in other
comprehensive income at the point the hedging relationship was terminated was
subsequently recognized in earnings proportionate to the sale of the underlying
NPS common stock.

         During the year ended June 30, 2004, the Company sold and repurchased
1.1 million shares, of NPS common stock to remove the transferability
restrictions on such shares, resulting in a net realized gain of $2.4 million,
included in other income (expense) in the consolidated statements of operations.

         As of June 30, 2004, the Company held 1.5 million shares of NPS common
stock valued at $31.5 million and included in investments in equity securities
on the accompanying consolidated balance sheets.

 (16) INCOME TAXES

         Under the asset and liability method of Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

         The components of the income tax provision (benefit) are summarized as
follows (in thousands):

                                                 Years Ended June 30,
                                        ---------------------------------------
                                            2004          2003         2002
                                        -------------  -----------  -----------
                                         (Restated)
Current:
 Federal                                   $    -       $     -       $     -
 State                                          -         6,589          (857)
                                        -------------  -----------  -----------
 Total current                                  -         6,589          (857)
                                        -------------  -----------  -----------
Deferred:
 Federal                                    2,404        (5,454)       (6,132)
 State                                        773          (912)       (2,134)
                                        -------------  -----------  -----------
 Total deferred                             3,177        (6,366)       (8,266)
                                        -------------  -----------  -----------
Income tax provision (benefit)             $3,177       $   223       $(9,123)
                                        =============  ===========  ===========



                                      F-25
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The following table represents a reconciliation between the reported
income taxes and the income taxes which would be computed by applying the
federal statutory rate (35%) to income before taxes (in thousands):

<TABLE>
<CAPTION>
                                                                                       Years Ended June 30,
                                                                           ---------------------------------------------
                                                                               2004            2003           2002
                                                                           -------------   -------------  --------------
                                                                            (Restated)
<S>                                                                        <C>             <C>           <C>
Income tax expense computed at federal statutory rate                         $ 2,585        $  16,082      $ 12,839
Non-deductible expenses                                                           420               -             -
Add (deduct) effect of:
State income taxes (including sale and purchase of state net operating            (49)           3,690        (1,931)
loss carryforwards), net of federal tax
Federal tax benefit through utilization of net operating loss                       -           (8,349)      (13,116)
carryforwards against current period income
Research and development tax credits                                           (1,400)               -             -
Increase (decrease) in beginning of year valuation allowance-federal            1,621          (11,200)       (6,915)
                                                                           -------------   -------------  --------------
                                                                              $ 3,177        $     223      $ (9,123)
                                                                           =============   =============  ==============
</TABLE>

         During 2004, 2003 and 2002, the Company recognized a tax benefit of
$254,000, $474,000 and $857,000, respectively, from the sale of certain state
net operating loss carryforwards.

         At June 30, 2004 and 2003, the tax effects of temporary differences
that give rise to the deferred tax assets and deferred tax liabilities are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                  Years ended June  30,
                                                               ---------------------------
                                                                   2004           2003
                                                               -------------   -----------
                                                                (Restated)
<S>                                                              <C>             <C>
Deferred tax assets:
 Inventories                                                     $   960         $   335
 Compensation                                                        457             992
 Returns and allowances                                            5,679           3,313
 Research and development credits carryforward                    13,248          10,408
 Federal AMT credits                                               1,643           1,447
 Deferred revenue                                                    378           1,319
 Capital loss carryforwards                                          722               -
 Write down of carrying value of investment                        8,956          11,126
 Federal and state net operating loss carryforwards               51,253          53,698
 Acquired in process research and development                      4,739               -
 Unrealized loss on securities                                     3,640               -
 Other                                                             1,221           1,164
                                                               -----------     -----------
  Total gross deferred tax assets                                 92,896          83,802
  Less valuation allowance                                       (16,473)        (12,884)
                                                               -----------     -----------
                                                                  76,423          70,918
                                                               -----------     -----------
Deferred tax liabilities:
 Goodwill                                                         (5,388)         (2,399)
 Unrealized gain on securities                                    (1,583)           (345)
 Book basis in excess of tax basis of acquired assets             (1,270)           (721)
                                                               -----------     -----------
                                                                  (8,241)         (3,465)
                                                               -----------     -----------
Net deferred tax assets                                          $68,182         $67,453
                                                               ============    ===========
</TABLE>

         A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. At June 30,
2004, the Company had federal net operating loss carryforwards of approximately
$126.0 million and combined state net operating loss carryforwards of
approximately $120.0 million that will expire in the years 2005 through 2021.
The Company also has federal research and development tax credit carryforwards
of approximately $10.6 million for tax reporting purposes, which expire in the
years 2005 to 2021. In addition, the Company has $1.8 million of state research
and development tax credit carryforwards, which will expire in the year 2010.
The Company's ability to use the net operating loss and research and development
tax credit carryforwards are subject to certain limitations due to ownership
changes, as defined by rules pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended.


                                      F-26
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         As of June 30, 2004, management believes that it is more likely than
not that the net deferred tax assets will be realized, including the net
operating losses from operating activities and stock option exercises, based on
future operations. The Company has maintained a valuation allowance of $16.5
million and $12.9 million at June 30, 2004 and 2003, respectively. The net
increase in the valuation allowance for 2004 was due to the determination that
it is more likely than not that the Company may not realize the tax benefits
attributable to certain capital loss carryforwards, deductible temporary
differences, which would result in a capital loss carryforward when realized,
and federal research and development credits at June 30, 2004. The Company will
continue to reassess the need for such valuation allowance in accordance with
SFAS No. 109 based on the future operating performance of the Company.

         The net operating loss carryforward stated above, includes $1.9 million
from the acquisition of Enzon Labs, Inc. the utilization of which is limited to
a maximum of $615,000 per year.

(17) SIGNIFICANT AGREEMENTS

     SCHERING AGREEMENT

         In November 1990, the Company entered into an agreement with
Schering-Plough. Under this agreement, Schering-Plough agreed to apply Enzon's
PEG technology to develop a modified form of Schering-Plough's INTRON A.
Schering-Plough is responsible for conducting and funding the clinical studies,
obtaining regulatory approval and marketing and manufacturing the product
worldwide on an exclusive basis and the Company receives royalties on worldwide
sales of PEG-INTRON for all indications. The royalty percentage to which the
Company is entitled will be lower in any country where a pegylated
alpha-interferon product is being marketed by a third party in competition with
PEG-INTRON, where such third party is not Hoffmann-La Roche.

         In June 1999, the Company amended its agreement with Schering-Plough,
which resulted in an increase in the effective royalty rate that it receives for
PEG-INTRON sales. In exchange, the Company relinquished its option to retain
exclusive U.S. manufacturing rights for this product. In addition, the Company
granted Schering-Plough a non-exclusive license under some of its PEG patents
relating to branched or U-PEG technology. This license gives Schering-Plough the
ability to sublicense rights under these patents to any party developing a
competing interferon product. During August 2001, Schering-Plough, pursuant to a
cross license agreement entered into as part of the settlement of certain patent
litigation, granted Hoffmann-La Roche a sublicense under the Company's branched
PEG patents to allow Hoffmann-La Roche to make, use, and sell its pegylated
alpha-interferon product, PEGASYS.

         Under this agreement, Schering-Plough was obligated to pay and has paid
the Company a total of $9.0 million in milestone payments, none of which is
refundable. These milestone payments were recognized when received, as the
earnings process was complete. Schering-Plough's obligation to pay the Company
royalties on sales of PEG-INTRON terminates, on a country-by-country basis, upon
the later of the date the last patent of the Company to contain a claim covering
PEG-INTRON expires in the country or 15 years after the first commercial sale of
PEG-INTRON in such country.

         Schering-Plough has the right to terminate this agreement at any time
if the Company fails to maintain the requisite liability insurance of $5.0
million. Either party may terminate the agreement upon a material breach of the
agreement by the other party that is not cured within 60 days of written notice
from the non-breaching party or upon declaration of bankruptcy by the other
party.

     AVENTIS AGREEMENT

         During June 2002, the Company amended its license agreement with
Aventis to reacquire rights to market and distribute ONCASPAR in the United
States, Mexico, Canada and the Asia/Pacific region. In return for the marketing
and distribution rights the Company paid Aventis $15.0 million and pays a 25%
royalty on net sales of ONCASPAR through 2014. The $15.0 million payment is
being amortized over its useful life of 14 years. The amortization and the 25%
royalty payment to Aventis are included in cost of sales for the product. Prior
to the amendment, Aventis was responsible for the marketing and distribution of
ONCASPAR. Under the previous agreement Aventis paid the Company a royalty on net
sales of ONCASPAR of 27.5% on annual sales up to $10.0 million and 25% on annual
sales exceeding $10.0 million.


                                      F-27
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The amended license agreement prohibits Aventis from making, using or
selling an asparaginase product in the U.S. or a competing PEG-asparaginase
product anywhere in the world until the later of the expiration of the agreement
or, if the agreement is terminated earlier, five years after termination. If the
Company ceases to distribute ONCASPAR, Aventis has the option to distribute the
product in the territories under the original license.

         Under the Company's license agreement with Aventis in effect prior to
the June 2002 amendment discussed above (the "Prior License Agreement"), Enzon
granted an exclusive license to Aventis to sell ONCASPAR in the U.S. Enzon has
received licensing payments totaling $6.0 million and was entitled to royalties
on net sales of ONCASPAR. During July 2000, the Company further amended the
license agreement with Aventis to increase the base royalty payable to the
Company on net sales of ONCASPAR from 23.5% to 27.5% on annual sales up to $10.0
million and 25% on annual sales exceeding $10.0 million. These royalty payments
included Aventis' cost of purchasing ONCASPAR under a separate supply agreement.
The agreement was also extended until 2016. Additionally, the Prior License
Agreement eliminated the super royalty of 43.5% on net sales of ONCASPAR which
exceeded certain agreed-upon amounts. The Prior License Agreement also provided
for a payment of $3.5 million in advance royalties, which was received in
January 1995.

         As part of the June 2002 amendment, the remaining unpaid royalty
advance on the balance sheet of $1.0 million was eliminated. This was offset
against the $15.0 million payment to Aventis and the net $14 million is included
in amortizable intangible assets, net and is being amortized over 14 years, the
estimated remaining life of ONCASPAR.

         During August 2000, the Company made a $1.5 million payment to Aventis
which was accrued at June 30, 2000 to settle a disagreement over the purchase
price of ONCASPAR under the supply agreement and to settle Aventis' claim that
Enzon should be responsible for Aventis' lost profits while ONCASPAR was under
temporary labeling and distribution modifications. In November 1998, the Company
and the FDA agreed to temporary labeling and distribution modifications for
ONCASPAR, as a result of certain previously disclosed manufacturing problems.
These temporary modifications resulted in Enzon, rather than Aventis,
distributing ONCASPAR directly to patients on an as needed basis.

         The settlement also called for a payment of $100,000 beginning in May
2000 and for each month that expired prior to the resumption of normal
distribution and labeling of this product by Aventis. During the quarter ended
December 31, 2000, the FDA gave final approval to the Company's manufacturing
changes, which were made to correct these problems, and all previously imposed
restrictions on ONCASPAR were lifted. This obligation was terminated pursuant to
the June 2002 amendment to the license agreement. Payments as required were made
through June 2002.

     MEDAC AGREEMENT

         In January 2003, the Company renewed an exclusive license to Medac GmbH
("Medac"), a private company based in Germany, to sell ONCASPAR and any
PEG-asparaginase product, developed by the Company or Medac, during the term of
the agreement in most of Europe and part of Asia. The Company's supply agreement
with Medac provides for Medac to purchase ONCASPAR from the Company at certain
established prices. Under the license agreement, Medac is also responsible to
pay the Company a royalty on units sold. Under the license agreement, Medac is
responsible for obtaining additional approvals and indications in the licensed
territories, beyond the currently approved hypersensitive indication in Germany.
Under the agreement, Medac is required to meet certain minimum purchase
requirements. The term of the agreement is for five years and will automatically
renew for an additional five years if Medac meets or exceeds certain diligence
requirements and thereafter the agreement will automatically renew for an
additional two years unless either party provides written notice of its intent
to terminate the agreement at least 12 months prior to the scheduled expiration
date. Following the expiration or termination of the agreement, all rights
granted to Medac will revert back to Enzon.

                                      F-28
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     NEKTAR ALLIANCE

         In January 2002, the Company entered into a broad strategic alliance
with Nektar Therapeutics that includes several components.

         The companies entered into a product development agreement to jointly
develop three products to be specified over time using Nektar's EnhanceTM
pulmonary delivery platform and SEDSTM supercritical fluids platform. Nektar
will be responsible for formulation development, delivery system supply, and in
some cases, early clinical development. The Company will have responsibility for
most clinical development and commercialization. This agreement terminates in
January 2007 unless terminated earlier by either party upon 90 days notice of a
material breach or 15 days notice of a payment default. Upon termination of the
agreement, the obligations of the parties to conduct development activities will
expire, but such termination shall not affect rights of either party that have
accrued (e.g., with respect to the ownership of intellectual property or the
right to certain payments) prior thereto.

         The two companies will also explore the development of single-chain
antibody (SCA) products for pulmonary administration.

         The Company has entered into a cross-license agreement with Nektar
under which each party has crosslicensed to the other party certain patents. The
Company also granted to Nektar the right to grant sub-licenses under certain of
the Company's PEG patents to third parties. The Company will receive a royalty
or a share of profits on final product sales of any products that use its
patented PEG technology. The Company anticipates that it will receive 0.5% or
less of Hoffmann-LaRoche's sales of PEGASYS, which represents equal profit
sharing with Nektar on this product. The Company retains the right to use all of
its PEG technology and certain of Nektar's PEG technology for its own product
portfolio, as well as those products it develops in co-commercialization
collaborations with third parties. This agreement expires upon the later of the
expiration of the last licensed patent or the date the parties are no longer
required to pay royalties. Either party may terminate the agreement upon a
material breach of the agreement by the other party that is not cured within 90
days of the receipt of written notice from the non-breaching party or upon the
declaration of bankruptcy by the other party.

         The Company purchased $40 million of newly issued Nektar convertible
preferred stock in January 2002. The preferred stock is convertible into Nektar
common stock at a conversion price of $22.79 per share. In the event Nektar's
common stock price three years from the date of issuance of the preferred stock
or earlier in certain circumstances is less than $22.79, the conversion price
will be adjusted down, although in no event will it be less than $18.23 per
share. Conversion of the preferred stock into common stock can occur anywhere
from 1 to 4 years following the issuance of the preferred stock or earlier in
certain circumstances. Under the cost method of accounting, investments are
carried at cost and are adjusted only for other-than-temporary declines in fair
value, and additional investments. As a result of a continued decline in the
price of Nektar's common stock, which the Company determined was
other-than-temporary, during December 31, 2002 the Company recorded a write-down
of the carrying value of its investment in Nektar, which resulted in a non-cash
charge of $27.2 million. The adjustment was calculated based on an assessment of
the fair value of the investment. During the year ended June 30, 2004, the
Company converted 50% of its Nektar preferred stock into common stock and sold
approximately 50% of the Company's investment in Nektar which resulted in a net
gain on investment of $11.0 million and cash proceeds of $17.4 million. (See
Note 23 for Write-Down of Investments.)

         The two companies also agreed in January 2002 to a settlement of the
patent infringement suit the Company filed in 1998 against Nektar's subsidiary,
Shearwater Polymers, Inc. Nektar has a license under the contested patents
pursuant to the cross-license agreement. The Company received a one-time payment
of $3.0 million from Nektar to cover expenses incurred in defending its branched
PEG patents.

     MICROMET ALLIANCE

         In April 2002, the Company entered into a multi-year strategic
collaboration with Micromet AG ("Micromet"), a private company based in Munich,
Germany, to identify and develop the next generation of antibody-based
therapeutics. In June 2004, the Company amended this agreement and extended this
collaboration until September 2007. During the first phase of the collaboration,
the partnership generated several new SCA compounds against undisclosed targets
in the fields of inflammatory and autoimmune diseases. The Company extended its
collaboration with Micromet to move the first of these newly created SCAs toward
clinical development. Under the terms of the amended agreement, Enzon and
Micromet will continue to share development costs and future revenues for the
joint development project.

                                      F-29
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Following the termination or expiration of the agreement, the rights to
antibody-based therapeutics identified or developed by Enzon and Micromet will
be determined in accordance with the United States rules of inventorship. In
addition, Enzon will acquire the rights to any PEGylation inventions. The
agreement can be terminated by either party upon a material breach of the
agreement by the other party. Research and development expenses incurred by the
Company in connection with this collaboration agreement totaled $3.2 million and
$1.7 for the year 2004 and 2003, respectively. There were no research and
development expenses incurred by the Company in connection with this
collaboration for the year ended June 30, 2002.

         In addition to the research and development collaboration, in 2002 the
Company also made an $8.3 million investment into Micromet in the form of a note
of Micromet, which was amended in June 2004. This note bears interest of 3% and
is payable in March 2007. This note is convertible into Micromet Common Stock at
a price of 15.56 euros per share at the election of either party. The carrying
value of the convertible note was written-down to zero in June 2004, due to an
other-than-temporary decline in the fair value of this investment. (See Note 23
for Write-Down of Investments.)

         Enzon and Micromet have entered into a cross-license agreement for each
company's respective SCA intellectual property and jointly market their combined
SCA technology to third parties. Micromet is the exclusive marketing partner and
has instituted a comprehensive licensing program on behalf of the partnership.
Any resulting revenues from the license agreement executed by Micromet on behalf
of the partnership will be used for Micromet's and Enzon's joint SCA development
activities.

     SKYEPHARMA AGREEMENT

In January 2003, the Company entered into a strategic alliance with SkyePharma,
plc ("SkyePharma") based on a broad technology access agreement. The two
companies agreed to jointly develop up to three products for future
commercialization. These products are based on SkyePharma's proprietary
platforms in the areas of oral, injectable and topical drug delivery, supported
by technology to enhance drug solubility and certain of the Company's
proprietary PEG modification technology, for which the Company received a $3.5
million technology access fee. This non-refundable upfront license fee, which
was recorded as unearned revenue in accrued expenses, is being ratably
recognized as revenue over the development agreement period of four years.
SkyePharma will receive a $2.0 million milestone payment for each product based
on its own proprietary technology that enters Phase 2 clinical development.
Certain research and development costs related to the technology alliance will
be shared equally based on an agreed upon annual budget, as will future revenues
generated from the commercialization of any jointly-developed products.

         Effective December 31, 2002, the Company also licensed the North
American rights to SkyePharma's DEPOCYT(R), an injectable chemotherapeutic
approved for the treatment of patients with lymphomatous meningitis. Under the
terms of the agreement, Enzon paid a license fee of $12.0 million. SkyePharma
manufactures DEPOCYT and Enzon purchases finished product at 35% of net sales,
which percentage can be reduced should certain defined sales target be exceeded.
The Company recorded the $12 million license fee as an intangible asset, which
is being amortized over a ten year period and charged to cost of sales.

         The Company was required to purchase minimum levels of finished product
for calendar year 2003 (90% of the previous year's sales by SkyePharma) and $5.0
million for each subsequent calendar year through the remaining term of the
agreement. SkyePharma is also entitled to a milestone payment of $5.0 million if
the Company's sales of the product are over a $17.5 million annual run rate for
four consecutive quarters and an additional milestone payment of $5.0 million if
Enzon's sales exceed an annualized run rate of $25.0 million for four
consecutive quarters. The Company is also responsible for a $10.0 million
milestone payment if the product receives approval for neo plastic meningitis
prior to December 31, 2006. This milestone payment is incrementally reduced if
the approval is received subsequent to December 31, 2006 to a minimum payment of
$5.0 million for an approval after December 31, 2007. The Company's license is
for an initial term of ten years and is automatically renewable for successive
two year terms thereafter.

         Either party may terminate the agreement early upon a material breach
by the other party, which breach the other party fails to cure within 60 days
after receiving notice thereof. Further, SkyePharma will be entitled to
terminate the agreement early if the Company fails to satisfy its Minimum Annual
Purchases. In addition, the Company will be entitled to terminate the agreement
early if a court or government agency renders a decision or issues an order that
prohibits the manufacture, use or sale of the product in the U.S. If a
therapeutically equivalent generic product enters the market and DEPOCYT's
market share decreases, the Company will enter into good faith discussions in an
attempt to agree on a reduction in its payment obligations to SkyePharma and a
fair allocation of the economic burdens resulting from the market entry of the
generic product. If the Company is unable to reach an agreement within 30 days,
then either party may terminate the agreement, which termination will be
effective 180 days after giving notice thereof. After termination of the
agreement, the companies will have no further obligation to each other, except
the fulfillment of obligations that accrued prior thereto (e.g., deliveries,
payments, etc.). In addition, for six months after any such termination, the
Company will have the right to distribute any quantity of product the Company
purchased from SkyePharma prior to termination.



                                      F-30
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FRESENIUS AGREEMENT

         In June 2003, the Company licensed the North American rights to develop
and commercialize ATG-FRESENIUS S from Fresenius Biotechnology. Under this
agreement, the Company is responsible for obtaining regulatory approval of the
product in the U.S. In September 2004, the Company made a milestone payment to
Fresenius of $1.0 million upon FDA approval of the first IND. The Company is
obligated to make another milestone payment of $1.0 million upon the Company's
submission of a biologics license application with the FDA. Fresenius will be
responsible for manufacturing and supplying the product to the Company and the
Company is required to purchase all of the finished product from Fresenius for
net sales of the product in North America. The Company will purchase finished
product at 40% of net sales, which percentage can be reduced should certain
defined sales targets be exceeded. The Company is required to purchase a minimum
of $2.0 million of product in the first year after commercial introduction and
$5.0 million in the second year, with no minimum purchase requirements
thereafter. Fresenius will supply the product to the Company without charge for
the clinical trials for the first indication. For subsequent trials, the Company
will purchase the clinical supplies from Fresenius.

INEX AGREEMENT

         In January 2004, the Company entered into a strategic partnership with
Inex Pharmaceuticals Corporation ("Inex") to develop and commercialize Inex's
proprietary oncology product MARQIBO(R), which was formerly referred to as Onco
TCS. In connection with the strategic partnership, the Company and Inex entered
into a Product Supply Agreement, a Development Agreement, and a Co-Promotion
Agreement. The agreements contain cross termination provisions under which
termination of one agreement triggers termination of all the agreements.

         Under the terms of the agreements, the Company received the exclusive
commercialization rights for MARQIBO for all indications in the United States,
Canada, and Mexico.

         Upon execution of the related agreements the Company made a $12.0
million up-front payment to Inex, which has been determined to be an acquisition
of in-process research and development as the payment was made prior to FDA
approval, and therefore expensed in the Company's Statement of Operations for
the quarter ended March 31, 2004. In addition, the Company will be required to
pay up to $20.0 million upon MARQIBO being approved by the FDA and development
milestones and sales-based bonus payments could total $43.75 million, of which
$10.0 million is payable upon annual sales first reaching $125.0 million, and
$15.0 million is payable upon annual sales first reaching $250.0 million. The
Company will also be required to pay Inex a percentage of commercial sales of
MARQIBO and this percentage will increase as sales reach certain predetermined
thresholds.

         The Company and Inex will share equally the future development costs to
obtain and maintain marketing approvals in North America for MARQIBO, and the
Company will pay all sales and marketing costs and certain other post-approval
clinical development costs typically associated with commercialization
activities. The Company plans to market MARQIBO to the oncology market through
its North American sales force, which currently markets ABELCET(R), ONCASPAR(R),
and DEPOCYT(R). Inex has the option of complementing the Company's sales efforts
by co-promoting MARQIBO through the formation of a dedicated North American
sales and medical science liaison force. The costs of building Inex's
co-promotion force will be shared equally by both companies and the Company will
record all sales in the licensed territories. Inex retains manufacturing rights
and the Company will reimburse Inex for the manufacture and supply of the drug
at manufacturing cost plus five percent.

         The agreements will expire on a country by country basis upon the
expiration of the last patent covering the licensed product in each particular
country or 15 years after the first commercial sale in such country, whichever
is later. The agreements are also subject to earlier termination under various
circumstances. The Company may terminate the agreements at any time upon 90 days
notice, in connection with which the Company must pay a $2.0 million termination
fee. Inex has completed the submission of its NDA, therefore if Enzon terminates
it must pay the $2.0 million fee. In addition, if at any time the Company
determines that it has no interest in commercializing the product in any
country, then Inex may terminate the agreement with respect to such country.
Either party may terminate the agreements upon a material breach and failure to
cure by the other party. In addition, either party may terminate the agreements
upon the other party's bankruptcy. Generally, the termination of the agreements
with respect to a particular country shall terminate the Company's license with
respect to MARQIBO, and preclude the Company from marketing the product, in that
country. However, if the

                                      F-31
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Company terminates the agreements because of Inex's breach or
bankruptcy, the licenses granted by Inex will continue, Inex will be obligated
to provide the Company a right of reference to Inex's regulatory dossiers and
facilitate a transfer to the Company of the technology necessary to manufacture
the product. In addition, after such termination, Inex will be obligated to
exercise commercially reasonable efforts to ensure that the Company has a
continuous supply of product until the Company, exercising commercially
reasonable efforts, has secured an alternative source of supply.

     MEDEUS MANUFACTURING AGREEMENT

         On November 22, 2002, we acquired from Elan Corporation plc ("Elan")
the North American rights and operational assets associated with the
development, manufacture, sales and marketing of ABELCET for $360 million plus
acquisition costs. This transaction is being accounted for as a business
combination. As part of the ABELCET acquisition, the Company entered into a
long-term manufacturing and supply agreement with Elan, under which the Company
continues to manufacture two products, ABELCET and MYOCET. In February 2004,
Elan sold its European sales and marketing business to Medeus Pharma Ltd.
("Medeus") and transferred the manufacturing and supply agreement to Medeus.
Under the terms of the 2002 ABELCET acquisition agreement, Medeus has the right
to market ABELCET in any markets outside of the U.S., Canada and Japan. ABELCET
is approved for use in approximately 26 countries for primary and/or refractory
invasive fungal infections.

         The agreement with Medeus, as successor to Elan, requires the Company
to supply Medeus with ABELCET and MYOCET through November 21, 2011. For the
period from November 22, 2002 until June 30, 2004, the Company supplied ABELCET
and MYOCET at fixed transfer prices, which approximated its manufacturing cost.
From July 1, 2004 to the termination of the agreement, the Company will supply
these products at its manufacturing cost plus fifteen percent.

         The agreement also provides that until June 30, 2004, Enzon will
calculate the actual product manufacturing costs on an annual basis and, to the
extent that this amount is greater than the respective transfer prices, Medeus
shall reimburse Enzon for such differences. Conversely, if such actual
manufacturing costs are less than the transfer price, Enzon shall reimburse
Medeus for such differences.

         During February 2004 Elan Corporation, plc, sold its ABELCET and MYOCET
European business to Medeus Pharma, Ltd. ("Medeus"). As part of this transaction
the Company's long-term manufacturing and supply agreement with Elan was
assigned to Medeus. In connection with the closing of this sale the Company and
Elan settled a dispute over the manufacturing cost of products produced for Elan
resulting in the payment and recognition of manufacturing revenue related to
approximately $1.7 million of revenue not previously recognized given the
uncertainty of the contractual amount.

     CEO SEPARATION AGREEMENT

         In connection with Mr. Higgins' departure as the Company's Chief
Executive Officer, the Board of Directors appointed a committee of four
independent directors (Dr. Rosina Dixon, Robert LeBuhn, Dr. David Golde and
Robert Parkinson) to review and approve the terms of Mr. Higgins departure. This
committee negotiated and approved a separation payment of $1.25 million, which
was paid to Mr. Higgins upon his departure in May 2004. Concurrent with Mr.
Higgins' departure as Chief Executive Officer in May 2004, the Company reversed
approximately $1.29 million of compensation expense previously recorded related
to restricted stock of the Company that was forfeited by Mr. Higgins as a result
of his departure as the Company's Chief Executive Officer. In the quarter ended
June 30, 2004, the Company reversed $1.18 million of compensation expense which
was previously recognized related to these restricted shares, including $764,000
which was recognized for the nine months ended March 31, 2004.


                                      F-32
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(18) RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 (revised December 2003) ("FIN46-R"),
Consolidation of Variable Interest Entities, which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly should consolidate
the entity. FIN 46-R replaces FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which was issued in January 2003. FIN
46-R requires that if an entity has a controlling financial interest in a
variable interest entity, the assets, liabilities and results of activities of
the variable interest entity should be included in the consolidated financial
statements of the entity. The provisions of FIN 46-R are effective immediately
to those entities that are considered to be special-purpose entities. For all
other arrangements, the FIN 46-R provisions are required to be adopted at the
beginning of the first interim or annual period ending after March 15, 2004. As
of June 30, 2004 the Company is not a party to transactions contemplated under
FIN 46-R.

         In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus opinion on EITF 00-21, Revenue Arrangements with Multiple
Deliverables. The consensus provides that revenue arrangements with multiple
deliverables should be divided into separate units of accounting if certain
criteria are met. The consideration for the arrangement should be allocated to
the separate units of accounting based on their relative fair values, with
different provisions if the fair value of all deliverables is not known or if
the fair value is contingent on delivery of specified items or performance
conditions. Applicable revenue recognition criteria should be considered
separately for each separate unit of accounting. EITF 00-21 is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of this standard did not have any impact on our financial
position or results of operations.

               In May 2003, the Financial Accounting Standards Board issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 requires that certain financial
instruments, which under previous guidance were accounted for as equity, must
now be accounted for as liabilities. The financial instruments affected include
mandatorily redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock. SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003 and must be applied to the Company's existing financial
instruments effective July 1, 2003, the beginning of the first fiscal period
after June 15, 2003. The Company adopted SFAS No. 150 on July 1, 2003. The
adoption of this statement did not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.

         In November 2003, the Emerging Issues Task Force ("EITF") reached an
interim consensus on Issue No. 03-01, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments, to require additional
disclosure requirements for securities classified as available-for-sale or
held-to-maturity for fiscal years ending after December 15, 2003. Those
additional disclosures have been incorporated into the notes to consolidated
financial statements. In March 2004, the EITF reached a final consensus on this
Issue, to provide additional guidance, which companies must follow in
determining whether investment securities have an impairment which should be
considered other-than-temporary. The guidance is applicable for reporting
periods after June 15, 2004. The Company does not expect the adoption under the
final consensus to have a significant impact on its financial position results
of operations and cash flows.

(19) COMMITMENTS AND CONTINGENCIES

         The Company has agreements with certain members of its upper
management, which provide for payments following a termination of employment
occurring after a change in control of the Company. The Company also has
employment agreements with certain members of upper management, which provides
for severance payments.

         The Company has been involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material effect on the
Company's consolidated financial position, results of operations or liquidity.

(20) LEASES

         The Company has several leases for office, warehouse, production and
research facilities and equipment. The non-cancelable lease-terms for the
operating leases expire at various dates between 2005 and 2021 and each
agreement includes renewal options.


                                      F-33
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Future minimum lease payments, for non-cancelable operating leases with
initial or remaining lease terms in excess of one year as of June 30, 2004 are
(in thousands):

                                                  Operating
Year ending June  30,                              leases
---------------------                           -------------
2005                                               $ 1,466
2006                                                 1,445
2007                                                 1,444
2008                                                 1,239
2009                                                   867
Thereafter                                           9,288
                                                -------------
Total minimum lease payments                       $15,749
                                                =============

         Rent expense amounted to $1.4 million, $1.3 million and $847,000 for
the years ended June 30, 2004, 2003 and 2002, respectively.

(21) RETIREMENT PLANS

         The Company maintains a defined contribution 401(k) pension plan for
substantially all its employees. The Company currently matches 50% of the
employee's contribution of up to 6% of compensation, as defined. Total Company
contributions for the years ended June 30, 2004, 2003, and 2002 were $627,000,
$375,000, $196,000, respectively.

         In September 2003, the Board of Directors adopted the Executive
Deferred Compensation Plan (the "Plan"). The Plan is to aid the Company in
attracting and retaining key employees by providing a non-qualified compensation
deferral vehicle. To date no contributions have been made to this plan.

(22) BUSINESS AND GEOGRAPHICAL SEGMENTS

         The Company is managed and operated as one business segment. The entire
business is comprehensively managed by a single management team that reports to
the Chief Executive Officer. The Company does not operate separate lines of
business or separate business entities with respect to any of its products or
product candidates.

         Accordingly, the Company does not prepare discrete financial
information with respect to separate product areas or by location and does not
have separately reportable segments as defined by SFAS No. 131.

         Revenues consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                  Years Ended June 30,
                                      ----------------------------------------
                                           2004           2003           2002
                                      ------------  -------------  -----------
<S>                                       <C>            <C>          <C>
Product sales, net
 ADAGEN                                  $ 17,113       $ 16,025      $13,441
 ONCASPAR                                  18,050         12,432        8,742
 DEPOCYT                                    5,029          2,458            -
 ABELCET                                   67,730         28,349            -
                                      ------------  -------------  -----------
  Total product sales                     107,922         59,264       22,183
 Manufacturing revenue                     12,911          8,742            -
 Royalties                                 47,707         77,589       53,329
 Contract revenues                          1,031            811          293
                                      ------------  -------------  -----------
  Total revenues                         $169,571       $146,406      $75,805
                                      ============  =============  ===========
</TABLE>

         During the years ended June 30, 2004, 2003 and 2002, the Company had
export sales and royalties recognized on export sales of $44.3 million, $40.2
million and $26.3 million, respectively. Of these amounts, sales and royalties
in Europe and royalties recognized on sales in Europe were $34.7 million, $35.5
and $24.9 million during the years ended June 30, 2004, 2003 and 2002,
respectively.

Outside the United States, the Company principally sells: ADAGEN(R) in Europe,
ONCASPAR in Germany, DEPOCYT(R) in Canada, and ABELCET in Canada. Information
regarding revenues attributable to the United States and to all foreign
countries collectively is stated below. The geographic classification of product
sales was based upon the location of the customer. The geographic classification
of all other revenues is based upon the domicile of the entity from which the
revenues were earned. Information is as follows (in thousands):


                                      F-34
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                              Years Ended June 30,
                                      --------------------------------------
                                         2004          2003         2002
                                      ------------  ------------  ----------
<S>                                      <C>           <C>          <C>
Revenues:
 United States                           $125,268      $106,160     $49,503
 Foreign countries                         44,303        40,246      26,302
                                      ------------  ------------  ----------
  Total revenues                         $169,571      $146,406     $75,805
                                      ============  ============  ==========
</TABLE>

(23) WRITE-DOWN OF INVESTMENTS

         In April 2002, the Company entered into a multi-year strategic
collaboration with Micromet and in June 2004, the Company amended this agreement
and extended the collaboration until September 2007. In 2002, the Company also
made an $8.3 million investment into Micromet in the form of a convertible note
due to Enzon, which was amended in June 2004. This note bears interest of 3% and
is payable in March 2007. This note is convertible into Micromet Common Stock at
a price of 15.56 euros per share at the election of either party. During the
year ended June 30, 2004, the Company recorded a write-down of the carrying
value of the investment, which resulted in a non-cash charge of $8.3 million.
The write-down of the Company's investment in Micromet was due to an
other-than-temporary decline in the value of this investment.

         In January 2002, the Company entered into a broad strategic alliance
with Nektar Therapeutics to co-develop products utilizing both companies'
proprietary drug delivery platforms. As a part of this agreement, the Company
purchased $40 million of newly issued Nektar convertible preferred stock, which
is currently convertible into Nektar common stock at Enzon's option at a
conversion price of $22.79 per share. The investment represented approximately
3% of Nektar's equivalent common shares outstanding at the time of issuance.
Under the cost method of accounting, non-marketable equity investments are
carried at cost and are adjusted only for other-than-temporary declines in fair
value and additional investments.

         As a result of a continued decline in the price of Nektar's common
stock, which the Company determined was other-than-temporary, during December
31, 2002 the Company recorded a write-down of the carrying value of its
investment in Nektar, which resulted in a non-cash charge of $27.2 million. The
adjustment was calculated based on an assessment of the fair value of the
investment which was determined during the quarter ended December 31, 2002 by
multiplying the number of shares of common stock that would be received based on
the conversion rate in place as of the date of the agreement ($22.79 per share)
by the closing price of Nektar common stock on December 31, 2002, less a 10%
discount to reflect the fact that the shares were not convertible as of December
31, 2002, the valuation date.

         As of June 30, 2004, the carrying value of the Nektar investment, which
is included in investments in equity securities and convertible note on the
accompanying consolidated balance sheet, was $6.4 million ($7.27 per share). The
closing price of Nektar common stock was $19.96 per share on June 30, 2004.



                                      F-35
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(24) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         As disclosed in Note 2, the Company has restated its consolidated
financial statements for the year ended June 30, 2004 and each of the
quarters ended September 30, 2003 through March 31, 2005. The following table
presents summarized unaudited quarterly financial data (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
                                                             Three Months Ended
                                        --------------------------------------------------------------
                                        September 30,    December  31,     March  1,     June  30,       Fiscal Year
          Previously Reported                2003             2003           2004           2004            2004
          -------------------           -----------------------------------------------------------------------------
<S>                                         <C>             <C>              <C>            <C>           <C>
Revenues                                    $40,644         $41,698          $44,379        $42,850       $169,571
Gross Profit (1)                             15,653          18,074           20,570         19,550         73,847
Tax Provision (Benefit)                       1,634           1,180           (5,505)         4,283          1,592
Net income (loss)                           $ 2,804         $ 2,319          $ 5,066        ($7,312)      $  2,877
                                        ==============  ================  ============  ============    =============
Net income (loss) per common share:
 Basic                                        $0.06           $0.05            $0.12         ($0.17)         $0.07
 Diluted                                      $0.06           $0.05            $0.12         ($0.17)         $0.07
Weighted average number of shares of
common stock outstanding-basic               43,290          43,307           43,368         43,394         43,350
Weighted average number of shares of
common stock and diluted potential
common shares                                43,629          43,586           43,817         43,394         43,522
</TABLE>

<TABLE>
<CAPTION>
                                                             Three Months Ended
                                        --------------------------------------------------------------
                                        September 30,     December 31,     March 31,      June 30,      Fiscal Year
               Restated                      2003             2003            2004         2004             2004
               --------                 --------------  ----------------  ------------  ------------    -------------
<S>                                      <C>               <C>             <C>            <C>           <C>
Revenues                                   $40,644           $41,698         $44,379        $42,850       $169,571
Gross Profit (1)                            15,653            18,073          20,570         19,551         73,847
Tax Provision (Benefit)                        482              (631)         (3,408)         6,735          3,177
Net income (loss)                          $ 1,136             ($303)        $ 8,103        ($4,728)      $  4,208
                                        ==============  ================  ============  ============    =============
Net income (loss) per common share:
 Basic                                        0.03            ($0.01)         $0.19          ($0.11)         $0.10
 Diluted                                      0.03            ($0.01)         $0.18          ($0.11)         $0.10
Weighted average number of shares of
common stock outstanding-basic              43,290            43,307          43,368         43,394         43,350
Weighted average number of shares of
common stock and diluted potential
common shares                               43,629            43,307          43,817         43,394         43,522
</TABLE>

<TABLE>
<CAPTION>
                                                             Three Months Ended
                                        --------------------------------------------------------------
                                        September 30,    December  31,    March  31,     June  30,      Fiscal Year
                                             2002             2002           2003          2003             2003
                                        --------------  ----------------  ------------  ------------    -------------
<S>                                      <C>               <C>             <C>            <C>           <C>
Revenues                                   $25,067           $31,497         $43,163        $46,679       $146,406
Gross Profit (1)                             4,144             4,187          15,556         15,598         39,485
Tax Provision (Benefit)                        261               245             156           (439)           223
Net income (loss)                          $12,784          ($15,244)        $ 7,634        $40,552       $ 45,726
                                        ==============  ================  ============  ============    =============
Net income (loss) per common share:
 Basic                                        $0.30           ($0.35)         $0.18          $0.94           $1.06
 Diluted                                      $0.29           ($0.35)         $0.17          $0.93           $1.05
Weighted average number of shares of
common stock outstanding-basic              42,980            43,011          43,192         43,264         43,116
Weighted average number of shares of
common stock and diluted potential
common shares                               43,681            43,011          43,634         43,609         43,615
</TABLE>
--------------
(1) Gross profit is calculated as the aggregate of product sales, net and
    manufacturing revenue less cost of sales and manufacturing revenue.


                                      F-36
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                      Additions
                                                              --------------------------
                                                                            Charged to
                                                 Balance at    Charged to     other                       Balance at
                                                beginning of   costs and    accounts -     Deductions -    end of
                                                   period       expenses     describe       describe       period
                                               -------------    --------     --------     -------------   -----------
<S>                                            <C>              <C>        <C>           <C>              <C>
Year ended June  30, 2004
 Allowance for chargebacks,
            returns and cash discounts            $7,134            -      $  52,619(1)   $(50,968)(2)       $8,785
     Investment in equity securities              27,237            -          8,341(4)    (13,619)          21,959
     Deferred tax valuation allowance             12,884            -          3,589(3)          -           16,473
Year ended June  30, 2003
 Allowance for chargebacks,
            returns and cash discounts                 -            -         18,020(1)    (10,886)(2)        7,134
Investment in equity securities                        -       27,237              -             -           27,237
     Deferred tax valuation allowance             78,809            -              -       (65,925)(3)       12,884
</TABLE>
------------
(1)  Amounts are recognized as a reduction from gross sales.
(2)  Chargebacks, returns and cash discounts processed.
(3)  Changes in valuation allowance.
(4)  Write down of carrying value of equity investments.


                                      F-37
<PAGE>


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit                                                                                 Page
Numbers                                  Description                                   Number
-------                                  -----------                                  ------
<S>        <C>                                                                      <C>
12.1       Computation of Ratio of Earnings to Fixed Charges                            E-1

23.0       Consent of registered public accounting firm                                 E-2

31.1       Certification of Principal Financial Officer and Principal Executive         E-3
           Officer pursuant to Section  302 of the Sarbanes - Oxley Act of 2002

31.2       Certification of Principal Financial Officer and Principal Executive         E-4
           Officer pursuant to Section  302 of the Sarbanes - Oxley Act of 2002

32.1       Certification of Principal Financial Officer and Principal Executive         E-5
           Officer Pursuant to Section  906 of the Sarbanes - Oxley Act of 2002

32.2       Certification of Principal Financial Officer and Principal Executive         E-6
           Officer Pursuant to Section  906 of the Sarbanes - Oxley Act of 2002
</TABLE>